The portfolio of a mutual fund scheme comprises different assets and not just different stocks. With each asset having a different value, the per-unit cost of the portfolio is obtained using the Net Asset Value (NAV). It is pertinent to mention that though NAV seems similar to the price of a share, they aren’t exactly the same.

Going by the definition, NAV is the price at which units of a mutual fund investment scheme is offered to investors. To a layman, it might appear like the fund assets remaining after incurring fund expenses and liabilities. NAV helps determine the usability of the scheme towards the achievement of financial goals. NAV is influenced by the price movements of the underlying assets and acts as an indication of whether the fund is churning out wealth for the investors.

The same can be determined by calculating the % increase in the mutual fund NAV. This can be intuitive, so there are some things that need to be kept in mind. Here we shall discuss some key points concerning the NAV-

1. Solving the dilemma between high NAV and low NAV

If you are someone who is confused between choosing a low-NAV or high-NAV, consider this example-suppose you have to choose between two multi-cap funds-FUND A and FUND B. NAV of FUND A is higher than B, so the number of units allotted would be higher in the former, implying greater wealth accumulation in the former. But hold on, you need to realise that NAV should not become a criterion for fund selection. Annualised returns and risks should be examined instead. A fund that is more valuable and delivers higher returns should be your first choice.

2. How is NAV calculated?

The NAV formula is as follows:

NAV = [current market value of the portfolio – (liabilities + expenses)] / number of units of outstanding securities

As can be observed, this simple formula has the aggregate market value divided by the number of units to obtain the NAV. The expenses and liabilities incurred are deducted from the value of the portfolio before dividing it by the number of outstanding securities.

3. Considering investment timing

The timing of investment comes to play specifically while determining which day’s NAV value would be applicable when you calculate the number of units that you will get. SEBI’s latest rule applicable from 1st Feb 2021 lays down that the application of NAV would depend on when the investment is credited to AMC’s bank account. With the enforcement of these rules, the cut-off timing for when NAV would be applicable has been fixed at 3:00 PM, both when redeeming from the mutual fund scheme and investing. So a person investing Rs 1 lakh in a mutual fund scheme. Transacting at 2:00 PM receiving credit in the AMC’s bank account at 2:30 PM will get 1000 units if the NAV for the day is Rs 100.

4. The value of NAV can drop.

Investment instruments in mutual funds can be stocks or bonds, companies, etc. whose value is highly mutable. So, if on any given day, the value of the assets held by a mutual fund is lesser than the previous day, the NAV will also be lower.

Thus, busting the myths and learning the essentials of mutual fund NAV is extremely important before you start investing.