Net Asset Value and its Significance

When thinking of Mutual funds, one of the first terms you will come across is NAV- Net Asset Value. What is this net asset value and how does it have an impact on our Mutual Funds?

Net asset value represents a fund’s per unit market value. This is the price at which investors buy (bid price) fund units from an AMC (Asset Management Company / Mutual Fund House)  and sell fund-units  (redemption price). This value is arrived at by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of units outstanding. An NAV computation is taken at the end of each trading day based on the closing market prices of the portfolio shares. Thus, NAV of a mutual fund unit is nothing but the book value.

Most people assume that NAV is just like the stock prices of various shares. This is where the confusion begins. NAV is based on several underlying assets which is why its value is declared only once (that is at the end of the day) the trading in those underlying assets is completed. Whereas, when it comes to a stock, the price keeps fluctuating all day during market hours. Moreover, unlike the stock price, the NAV does not give an idea about the performance of the mutual funds scheme. One cannot gauge the future of the fund on the basis of its NAV.

Let us now understand what High and Low NAV mean and how they affect us.

Low NAV: Every time a fund house launches a New Fund Offer (NFO), the units of that fund are available for a standard NAV of Rs.10/- this shouldn’t be a deterrent. Further, as we have already understood the calculation of NAV, a fund could have a lower NAV because its net assets are low or the no. of outstanding units is high (due to a temporary transition like NAV split, etc.). Also, a fund’s NAV decreases proportionately whenever it pays out dividends.

High NAV: Similarly, a high NAV could be because of good performance over the years. But one should always keep in mind that mutual funds are not like shares whose performance can be judged on the basis of the NAV.

NAV and its impact on Returns

Sometimes, people think that an MF with a lower NAV value will generate better results. All these perceptions are due to limited knowledge on the subject matter of NAV.

Let’s say you have Rs.10000/- to invest. You have zeroed down on two MF  schemes which are very similar to each other and suit your needs. But let’s say Scheme A has an NAV of Rs.10/- and  Scheme B has an NAV of Rs.50/-. You will either get 1000 units of Fund A, or 200 units of Fund B. Now let us see what your returns would be like had you invested in both these schemes and how they would differ from one another. After one year, both would have grown equally, because essentially they were almost the same apart from the NAV values. If both the funds had increased by 25%, the NAV of Scheme A would be 12.50/- and the NAV of Scheme B would 62.50/-. Thus, the value of your investment in Scheme A after one year would be 1000*12.50=12,500 and for Scheme B would be 200*62.50=12,500. The returns of both the Scheme after one year are the same irrespective of the NAV.

As seen from the example above, you will realise that it is not the NAV that makes a difference in returns that you get, it is the performance of the scheme you have selected that will make all the difference. The money growth will depend on how the fund performs and also on the people managing the fund.

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