What is NAV of a Mutual Fund?

by | Oct 17, 2017 | Financial Services

The NAV (net asset value) of a mutual fund has been misunderstood by a large mass of the investing community.

This is surely known from the way that mutual funds are as of late gathering enormous corpus in their New Fund Offers, or NFOs, while then again the accumulations in the current plans were unimportant.

Truth be told, investors sold their current ventures and put resources into NFOs. This switch has neither rhyme nor reason, unless the new fund has something other than what’s expected and better to offer.

Definition of Net Asset Value

Net Asset Value, or NAV, is the sum total of the market value of all the shares held in the portfolio that includes cash, less the liabilities, divided by outstanding total number of units. Therefore, NAV of a mutual fund unit is the ‘book value.’

NAV’s impact on the returns

Most people think that a Mutual Fund with lower Net Asset Value will give better returns. But this is again a wrong perception about Net Asset Value. The following example will make it clear that the returns are free of the NAV.

For instance say, a person has Rs. 10,000 to invest. And there are two options, but the funds are same for the portfolio. But suppose one Fund A has a NAV of Rs. 10 and another Fund V has a NAV of Rs. 50. You will get 1000 units of Fund A or 200 units of Fund B.

After a year, both funds would be equal as their portfolio is the same, by 25%. Then NAV after a year would be Rs. 12.50 for Fund A and Rs. 62.50 for Fund B. The value of the investment would be 1000×12.50 = Rs. 12,500 for Fund A and 200×62.5 = Rs. 12,500 for Fund B. Therefore the returns would be same irrespective of the NAV.

It is the quality of fund that makes a difference to the returns. In fact for equity shares as well this logic applies.

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