NAV Calculation

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Find out how NAV is calculated and its importance in Mutual Funds

Key Takeaways

• NAV stands for Net Asset Value.
• It represents the market value of a share in a mutual fund.
• You calculate NAV by dividing the net assets by the total number of outstanding mutual fund units.
• NAV indicates the past performance of a mutual fund.
• NAV does not determine the future value of a mutual fund.

Introduction

How does an investor know where to invest? Or what mutual fund to choose? These are some questions that come to mind when you want to invest. All investments provide a specific parameter that helps you to make an informed investment decision. Similarly, in Mutual Funds, investors consider the NAV of the fund as one of the determining factors. Let us understand Mutual Fund NAV calculation in this article.

NAV Calculation – What is it?

Often associated with Mutual Fund investments, the Net Asset Value (NAV) is the market value of a share of a particular mutual fund. You can calculate NAV by dividing the difference between the assets and liabilities of a company by its number of outstanding shares. NAV aids investors to analyse if the fund is undervalued or overvalued. It computes the value of a particular fund that you will receive when you withdraw your investment.

How NAV is Calculated – The Formula

NAV is the per-unit market value of a mutual fund, where you divide the net assets of the fund by the total number of outstanding units. The mathematical formula for Mutual Fund NAV calculation is:

Net Asset Value = (Assets – Liabilities)/Total Number of Outstanding Units

Here, the assets include the value of securities held and liquid cash, equity, debentures, bonds, exchange bills, commercial papers, any interest or dividend earned. The liabilities include expenses in the form of money payable, interest payable, fund management expenses etc. Fund Managers calculate the NAV of a mutual fund at the end of the market day.

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NAV Calculation – Example

Let us say a mutual fund has INR 100 lakh worth of total investments in securities calculated based on the closing prices for each asset. It also has INR 6 Lakh of cash and cash equivalents and INR 3.5 lakh in total receivables. Accrued income for the day is INR 8000. The fund has INR 20 lakh in short-term liabilities and INR 1.5 lakh in long-term liabilities, and expenses for the day are INR 2000. The fund has INR 5 lakh shares outstanding. Using the above formula, the NAV is calculated as:

[(100,00,000 + 6,00,000 + 3,50,000 + 8000) – (20,00,000 + 1,50,000 + 2000)]/5,00,000 = 17.61

Your mutual fund will be traded at the closing price of INR 17.61 per share for the given day.

The Role of Net Asset Value Calculation in Mutual Funds

NAV is commonly misconstrued as the same as shares priced in the stock market. Investors believe that low NAV means better investments. However, that is not the case. The mutual fund NAV indicates how the underlying assets have performed in the past. It shows how a mutual fund scheme performs at the end of a business day and does not indicate the profitability of the fund.

Conclusion

As a mutual fund investor, you conduct NAV calculations before investing. The NAV, however significant, does not determine the future performance of the mutual fund. However, by studying the NAV, you can assess if a fund can adequately fulfil your investment objectives per your risk appetite.

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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.