Mutual Funds NAV Saga Unfold Here-Know It & Consolidate Your Future!

Is financial security your top priority? Want to effectively deal with the uncertainties of life? Are you gunning for long-term financial goals? If these are what you seek, then mutual funds could just be the tool you need. There are some investments that can offer you a stable income path. But you know the villain in inflation, which actually can be a spoiler of your dreams by making the proceeds from those investments redundant to your cause. This is where the mutual funds prove to be a winner. By virtues of diversification, a mutual fund minimizes the risk element and lets the capital appreciate over the long-term. A sound investment journey is based upon many things like mutual funds NAV. Aware of this phenomenon? If not, then this article is the perfect guide for you to know the same.

What is Mutual Funds NAV?

The net asset value (NAV) of mutual funds denotes the price at which you can buy or sell the fund units. Post the deduction of liabilities from the assets, the NAV of a fund is derived. Like in the case of the stock market where the share prices undergo change on a daily basis, the NAVs of mutual funds also change day-by-day. The Value of all the units of a mutual fund is computed by subtracting the expenses. The obtained value is further divided by the total units that are there in a portfolio to come up with NAV. Let us get little deeper and calculate the NAV in a comprehensive manner.

NAV Calculation-

There were words 'Assets' and Liabilities' mentioned above. Now let us know, what do they constitute? The assets of a mutual fund consist of securities and cash. Stocks, bonds, dividends and interest accrued are the sub-parts of assets. The market value of all these instruments is added to bring forth the fund's total asset value. While the liabilities mean the money the fund owes to the creditors as well as expenses arising from distribution fee, management fee, custodian fee, transfer agent fee and others. You can check below the formula to arrive at NAV.

NAV=(Assets-Debts)/Number of Outstanding Units

Assets=Market Value of Investments+Accrued Income+Receivables

Debts=Liabilities +Accrued Expenses

Does NAV Impact Returns?

Many have the feeling that mutual fund returns get bolstered with lower NAV. But that is wrong. For this aspect to understand better, you need to take the course of an example below.

Example-You want to invest ₹ 10,000 in two funds with the same portfolio. The NAV of Fund I and Fund II is ₹ 25 and ₹ 40, respectively. In that case, you would get 400 units of Fund I and 250 units of Fund II. A year later, both the funds are expected to grow equally due to the same portfolio they have. The growth, assumingly, is 20%. The NAV would thus be 30 and 48, respectively, for both the funds after a year. The value of the investment would then be- 400 x 30= 12,000 (Fund - 250 x 48= 12,000 (Fund II)

The investment value remains independent of the change in NAV if the portfolio growth remains the same.                                                                                                 

Significance of NAV-

With a constant track of the NAV, you give yourself an opportunity to assess the performance of a particular fund better. So, if you are new to the mutual fund, it is essential you check the NAVs of different funds and see the fluctuations in those at different points of time. Because, at the end of the day, the buying and selling of the mutual fund units are done at the value as on the day of buy and redemption. Also check the impact of fluctuations on the overall mutual funds investment value before investing your capital in a mutual fund.  

NAVs Dependent on Choice of Plans-

Basically, there are two types of mutual plans on offer, regular and direct, with the latter being introduced by the markets regulator SEBI in 2013. Above there is a brief mention on the various fees that the funds pay. Within that, distributor fee is also there. It is the case with regular plans, which are in the market for very long. But in the case of direct plans, there is no distributor fee involved as investors can subscribe such plans directly from the asset management company (AMC), thus eliminating the distributor fee and getting the NAVs higher than the regular plans of the same fund.


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