When it comes to strengthening your investment portfolio, mutual funds are the most preferred choice of investors. Even though there are numerous reasons for its popularity, the most significant of them all is that mutual funds allow investors to diversify their portfolios and reduce risks to earn considerable profit.
Mutual funds might be an investment concept everyone has heard of, but not everyone is aware of how they work, and the concepts associated with them. So, if you are one of them, it’s essential you start with understanding the concepts and terms.
One such term and concept is NAV in Mutual Fund. Today, we’ll tell you all about it in this comprehensive guide.
What is NAV in Mutual Fund?
NAV stands for Net Asset Value. As mutual funds involve buying certain units of a share or bond, NAV refers to the unit price of those investment units. In other words, it is the price at which you purchase and sell the units of the financial instrument.
Explaining it with an example, let’s say you plan to invest INR 50,000 rupees in Mutual Funds. You go through a fund of your choice, whose NAV at present is INR 50. So, according to the amount invested by you, you will be purchasing 1,000 (50,000/50) units of the fund.
In simple words, NAV in a mutual fund is the price per unit. Thus, whenever you buy or sell your mutual fund units of a scheme, you use the NAV of the scheme in the purchase.
How is NAV in Mutual Fund Calculated?
Before we understand how NAV in a mutual fund is calculated, it’s essential we understand how mutual funds work in the first place.
As the name suggests, a mutual fund pools in funds from multiple investors who share the same investment objectives. This collected money is then used to invest in multiple investment assets. The multiple investment options include equity, bonds, debentures, debt instruments and gold instruments. These financial assets influence the return generated by the fund, according to the risk appetite chosen by the investor.
Even though you have the freedom of deciding the types of mutual funds, according to your risk appetite and financial goals, it is the fund managers who manage the funds.
The NAV in a mutual fund will depend on the portfolio value. The value of a portfolio depends on the value of financial assets owned by an investor at a particular date.
In addition to that, NAV in mutual fund depends on expenses that are incurred by the fund managers. A mutual fund house, or an Asset Management Company needs to incur expenses to operate and manage the fund. These expenses can include commission payable to brokers, marketing charges, custody charges, and a lot more.
These expenses also determine the Net Asset Value. But for that, Net Assets need to be calculated. Net Assets are calculated when these expenses are deducted from the assets held in the portfolio.
Once Net Assets are calculated, NAV inmutual fund is calculated through NAV formula, ie.eupon dividing Net Assets by Outstanding units.
Therefore, NAV formula is Net Asset Value = (Total Assets – Total Liabilities) / Number of Outstanding Units
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Difference between NAV in Mutual Funds and Share Price
If you have understood the concept of NAV, one common thought that is likely to cross your mind is, how is NAV different from the share price. Going by the definition, they seem to be the same.
However, it is to be noted that the NAV and share price are not the same.
Here are the basic differences between NAV in Mutual funds and share price:
| NAV in Mutual Fund | Share Price |
| NAV in mutual fund is computed on the basis the value of investment instruments. It is the value of a mutual fund unit. One unit of mutual fund contains multiple securities and investment instruments. | A share price on the other hand, indicates the intrinsic value of the firm/company. |
| The demand for a mutual fund doesn’t influence the value of the NAV. | Demand and supply affect the share prices. |
| NAV is computed only after the market hours. | Share prices are dynamic, which means they fluctuate every minute of the market hours. |
| Units of mutual funds are held by the Mutual Fund investors and managed by fund managers. | Equity investors hold ownership in the form of company shares. |
The Bottom Line
Now that you have understood the concept of NAV in mutual funds, it would be easier for you to understand how mutual funds. Mutual funds are an excellent investment option if your goal is to strengthen your investment portfolio. If you are investing in mutual funds, ensure that go through the do’s and don’ts before taking a step.
