What is the Meaning of NAV in Mutual Funds?
For beginners, the financial world can be a lot to grasp. Investing in mutual funds, a major investment asset class, comes with its own difficult terminologies. One such important word is NAV, which is short for Net Asset Value. This blog will help you understand what NAV in mutual funds means in layman’s terms. We focus on how NAV is calculated, its importance, and the calculations concerning mutual fund investments.
What is NAV in Mutual Funds?
NAV means ‘per unit price’ of a mutual fund and is an acronym for Net Asset Value. Thus, it shows the worth of a share of a mutual fund on a particular date. It also helps understand what value a mutual fund investment is currently worth.
Consider NAV to be the ‘per unit price’ of a mutual fund. This is different from the stock price, which changes within the trading hours, and is calculated at the end of the day based on the last prices of the securities managed by the mutual fund.
What is the Importance of NAV in Mutual Funds?
NAV is a very significant aspect for those investing in mutual funds. Let me explain:
1. Investment Value
The value of each mutual fund share is expressed through an indicator known as NAV. In other words, owning 10 units of an NAV 100 fund equates to ₹1000.


2. Fund Comparison
NAV is helpful when measuring the performance of various mutual funds. However, it should be noted that it does not mean that high or low NAVs perform well or poorly relative to other funds. This is not the most important consideration. The fund’s history and methods used prior are more significant.
3. Buying Units
Sometimes the investor’s return depends on how much he paid, which is equal to the NAV of the mutual fund. For instance, if an investor pays ₹10,000 to buy, he will obtain 200 units of the fund with a NAV of ₹50. Selling units is equally easy.
How Do You Calculate the NAV of a Mutual Fund?
The calculation is straightforward:
NAV = (Total Assets – Total Liabilities) / Number of Units Outstanding
Here’s what the terms mean:
- Total Assets: Includes stocks, bonds, and other assets—essentially all the securities that the mutual fund invests in combined.
- Total Liabilities: Refers to the fund’s expenses and obligations such as operational, administration, and management fees.
- Number of Units Outstanding: Refers to the amount of unit trust that is held by investors.
Example
If a mutual fund has total assets of ₹500 crores, total liabilities of ₹20 crores, and 10 crore units outstanding, the NAV would be calculated as follows:
NAV = (₹500 crores – ₹20 crores) ÷ 10 crores = ₹48
Common Misinterpretations About NAV
A lot of investors believe that investing in funds with smaller NAV is more ideal or affordable. This is false. The NAV solely indicates the net worth of the obtained fund and says almost nothing about the performance or possible incoming returns of the fund. Hence, some clarification is needed.
1. Low NAV Doesn’t Mean High Returns
A low NAV does not suggest there will be high returns from the fund. Returns depend entirely on the fund’s portfolio and how the market performs.
2. High NAV Isn’t Overpriced
A fund with a high NAV isn’t “overpriced.” It simply indicates that the fund has been in operation longer or has experienced growth in value.
3. Daily Changes in NAV
Since the NAV reflects the market value of the fund’s holdings, it fluctuates daily.
What is the Role of NAV in Mutual Fund Investments?
Every mutual fund operation revolves around the NAV. Whether you are purchasing, selling, or switching funds, what you pay or receive will always depend on the NAV. Let’s break it down:
1. Purchasing Units of a Mutual Fund
When you invest in a mutual fund, you buy units computed by the NAV. For instance, if the NAV is ₹100 and you invest ₹10,000, you will receive 100 units.
2. Redeeming Units of a Mutual Fund
When you redeem your units, the NAV determines your redemption value. For example, if the NAV is ₹120 and you own 100 units, your total proceeds will be ₹12,000.
3. SIP
In a Systematic Investment Plan (SIP), your monthly contribution buys units based on the prevailing NAV. Over time, this reduces the average cost of investment due to rupee cost averaging.
Factors Influencing NAV
Several factors determine the NAV of a mutual fund:
1. Market Performance
The valuation of the securities in the fund’s portfolio determines the NAV. When the market performs well, the NAV increases, and vice versa.
2. Dividends and Interest Income
Mutual funds earn income through dividends from stocks and interest from bonds, which positively contribute to the NAV.
3. Fund Expenses
Operational expenses, such as administrative and management fees, impact the NAV negatively.
4. Capital Gains
When a fund sells securities for a profit, it adds to the NAV.
Selecting the Right Fund: NAV vs. Performance
While understanding what is NAV in mutual funds is crucial, it’s not the only factor to consider when choosing a mutual fund. Here’s what to evaluate:
- Fund Performance: Consider the fund’s historical returns and its growth compared to its benchmark.
- Expense Ratio: Lower expense ratios are more favorable for investors.
- Risk Profile: Determine your risk appetite and choose funds that align with your financial goals.
- Portfolio Composition: Examine the fund’s holdings to ensure they align with your investment objectives.
Conclusion
Net Asset Value or NAV is a fundamental concept in mutual fund investments. It indicates the per-unit value of a mutual fund and helps determine the worth of your investment. However, it’s important not to base your investment decisions solely on NAV. Instead, focus on the fund’s overall performance, expense ratio, and alignment with your financial objectives.
Understanding what is NAV in mutual funds empowers you to make better investment decisions and maximize your returns. Take advantage of opportunities like stock market free webinars and stock market courses online free with certificate to strengthen your financial knowledge.