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Ventura Wealth Clients
4 min Read

When you shop for clothes or accessories, you tend to check their price tags because that’s one of the most important considerations in your buying decision. But should you follow the same approach when it comes to investing in mutual funds? At what price are mutual funds bought and redeemed—i.e. cashed in? And how is the price of a mutual fund determined?

Topics covered in this article

  • What is NAV in Mutual Funds?
  • How is Net Asset Value (NAV) calculated?
  • Should NAV matter to investors?

NAV meaning? Some of you might wonder! 

First things first: mutual funds pool money from investors and invest in capital markets on their behalf with the help of professionals. Investors have a claim on the assets of a scheme that is proportional to their investment amount. To establish this claim, Net Asset Value (NAV) is used as a price reference in mutual fund transactions. 

What is NAV in mutual funds and how is it calculated?

When you invest in mutual funds, a mutual fund scheme offers you units based on the current NAV and at the time of redemption, the scheme liquidates your units and pays you a sum for those units based on the prevailing NAV. 

NAV= (Sum of all assets – liabilities) / total number of units outstanding 

For instance, a mutual fund scheme collected Rs 500 crore during its New Fund Offer (NFO) period and issued units to investors at Rs 10 each—i.e. 50 crore units overall. With markets rising steadily over the next 1 year, the Assets under Management (AUM) grew from Rs 500 crore to Rs 600 crore. To keep things simple, let’s assume that the scheme didn’t issue any fresh units. In other words, the entire growth in the asset base was on account of a rise in the market value of assets. 

When expressed per unit terms, Rs 600 crore transpired to an NAV of Rs 12 (Rs 600 crore / 50 crore units). The difference between a buy NAV and a Sell NAV is your gain—which is 20% (since the NAV moved from Rs 10 to Rs 12 per unit) in this case. It’s noteworthy that unless you redeem your units, the gains are notional, meaning they are only on paper and can fluctuate depending on market conditions. 

Should I consider only those funds whose NAV is low? 

No! In absolute terms, NAV is just a number and doesn’t have any implication for your returns. For more clarity, let’s continue with an example we discussed earlier. A mutual fund scheme that collected Rs 500 crore during NFO decided to allot units to its investors at Rs 100 each (instead of Rs 10, as mentioned previously). 

Now, the total number of units outstanding would be 5 crore (and not 50 crore). Assuming no further creation of units, the AUM touched Rs 600 on account of market movement, thereby translating into an NAV of Rs 120 (Rs 600 crore / 5 crore units). Did you notice that the percentage gain is the same as we saw in the previous example, despite the NAV being 10 times higher? 

In brief, NAV is insignificant and should not be considered while investing.

If not Net Asset Value, then what does affect my mutual fund returns?

From an investor’s perspective, what matters most is the performance of an underlying portfolio. And it entirely depends on two factors: the overall market movement and the skills of the fund management team. If you are investing in an equity mutual fund, the number of years you spend in the market matters the most. 

In summary

NAV is the price at which investors buy and redeem their mutual fund units. Whether the NAV is high or low doesn’t matter to your investment performance. The real differentiating factor is the quality of the mutual fund portfolio and the effectiveness of the strategies of the fund management team. 

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a reason to buy/hold/sell any stock or a mutual fund. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.
Mutual Funds are subject to market risks and you should pay close attention to risk factors before investing. We strongly suggest you consult your financial advisor before making any decision pertaining to your finances. Asset allocation becomes extremely relevant.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to the blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in the securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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