What is Mutual Fund NAV and what it is not – 5 important things to know

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It may seem obvious when it comes to the question of what is a mutual fund NAV. But going by the queries we often receive from our customers, there are misconceptions over what the mutual fund NAV indicates, and how you should use it. Here is a look at how mutual fund NAVs should and should not be viewed.

mutual fund nav

What is mutual fund NAV?

Let’s start at the very beginning. Mutual funds are pooled investment vehicles that invest money from the investors in different types of securities in line with pre-defined objectives. The NAV or net asset value of a mutual fund is the market value of the securities held by the fund (after deducting liabilities and fund expenses), divided by the total number of units. It is calculated at the end of each trading day after the markets close. 

The mutual fund NAV determines the number of units an investor gets when he / she invests in a fund and the value of an investment at a given point in time or at redemption. 

For instance, an investor wanting to invest Rs. 5,000 in a fund with an NAV of Rs. 20 would be allotted 250 units (Rs. 5,000 /NAV per unit of Rs. 20). If after a year, the investor redeems his units and the NAV has climbed to Rs. 30 he would receive Rs. 7,500 (250 units * NAV of Rs. 30 per unit). 

The mutual fund NAV, therefore, is just a figure that is used to account for each investor’s investment in the mutual fund. Nothing more, nothing less. The absolute NAV itself does not matter.

 To make matters clearer, look at the table below.

As you can see, investing in either of these funds has yielded an identical result despite the fact that they had very different NAVs.

Is mutual fund NAV the ‘price’ of a mutual fund?

While it is easy to think of NAV as the ‘price’ of a mutual fund, this only works as far as determining the number of units you get when you enter and how much your units are worth when you exit. The NAV is determined by the market value of the underlying securities that the fund holds in its portfolio. The NAV is NOT determined by demand and supply for units. 

So, if not demand and supply, what makes the mutual fund NAV move up or down? Several factors affect the NAV and the top among them are: 

  • The market value of the stocks or bonds that the fund holds
  • Changes in the portfolio via purchase or sale of securities
  • Profits or losses on the stocks or bonds held or sold
  • Expenses of the fund

The mutual fund NAV is not the price of a fund if you view it in the manner that you view stocks (as many of you do). A fund is simply a collection of securities. The mutual fund NAV reflects the per-unit value of that collection. The fund portfolio itself has no underlying business or intrinsic value to judge whether there’s value in the fund. The NAV does not reflect a fund’s return prospects. 

This is unlike stocks, where you need to judge whether or not it is overpriced in relation to its growth prospects and if it is worth investing in. Now, you could argue that you can look at the stocks in a portfolio, and therefore decide whether or not the fund holds value stocks or arrive at potential in the fund. Similarly, in a debt fund you could look at the interest rates of the underlying bonds and work out potential returns. Well, yes. But you aren’t looking at or comparing the fund’s NAV here.

You are comparing the portfolio to see if the fund holds stocks with better prospects. This relates to fund strategy and seeing which fund has a strategy that can work. This apart, the fund’s portfolio will change. It could add new stocks, exit others, increase or decrease weights in existing stocks (or bonds). So any conclusion you come to is also subject to change.

Low mutual fund NAV – Investment opportunity?

A low stock price on a stock with very strong fundamentals and earnings potential may present an opportunity to buy. This will not hold true in the case of mutual funds simply because the NAV, as explained above, is not the ‘price’ of the fund nor an indicator of its value or potential. 

A higher mutual fund NAV could simply indicate that the fund has been around for longer - and not that the fund is overvalued or that it cannot move much higher. If the market moves up, the fund’s NAV will also move up. Just as there is no limit to how high the market can go, so too there is no limit on how high an NAV can go. A fund with a low NAV is no better or worse than a fund with a high NAV. It does not mean that you are getting units ‘cheap’. 

It would therefore be pointless to compare the NAVs of two funds with each other.  As you can see from the first example above, a low mutual fund NAV and a high mutual fund NAV make the exact same investment value for you, if the returns are the same.

Do NFOs present an opportunity to buy cheap?

The ‘cheap’ argument is often used in new fund offers (NFO) as well, and are likened to IPOs of companies. That is, NFOs are thought to present an opportunity to buy into a fund while it is cheap. 

An NFO is when an AMC launches a new fund to collect money from investors for the very first time. At this point, it is just a pool of money and nothing more. NFOs are launched with an NAV of Rs. 10 as a matter of convenience in accounting, as there is no portfolio at the time of launch.

Once the NFO period concludes, the fund will deploy the amount raised into stocks or bonds. At this time, there’s an actual market value of the portfolio and the NAV will immediately reflect that. So, post an NFO, the NAV can drop below Rs 10 if the portfolio value dips, or can move higher. There’s no way you will know what will happen to the NFO’s NAV once it invests the amount collected. 

The NFO also comes with the challenge of evaluating the fund. Unlike a fund that has been around for a while, an NFO has no track record to judge ability to perform. Our earlier article on investing in NFOs offers insights on factors that should be considered while evaluating NFOs.

Then how should mutual funds be evaluated?

So, does this mean the NAV is an entirely useless number? No! 

What is important in a fund is the returns – which comes from the movement of the NAV. The NAV serves the very important function of indicating how well the fund has performed in the past by comparing its NAVs between two dates and seeing how it has moved.

Let’s take the same example of Fund 1 and Fund 2 that we started out with. Now, consider 2 scenarios where Fund 1 delivers better than Fund 2 and vice versa.

As you can see, it is returns generated and not the NAV itself that tells you whether one fund is better than the other. Therefore, the standalone NAV on a given date viewed in isolation will tell you nothing about a fund. Seeing how the mutual fund NAV moves, tells you how the fund has performed. Comparing this performance across similar funds will tell you if one is better than the other. 

What matters is a fund’s returns since that is the only factor that will increase your investment value. Therefore, when evaluating a fund, don’t look at the NAV. Understand what can move the NAV. These are the factors that should figure in a discussion to evaluate a fund:

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