Net Asset Value is the per-unit price of a mutual fund. It is calculated by taking everything the fund owns, subtracting everything it owes, and dividing by the number of units investors hold.
If a fund holds securities and cash worth Rs 100 crore, owes Rs 1 crore in fees and payables, and has 9.9 crore units outstanding, its NAV is Rs 10 per unit.
When the NAV is set
Indian mutual funds are priced once a day, after the markets close. The fund values every holding at that day's closing price, deducts expenses, and publishes a single NAV for the day.
This has a practical consequence people trip over. If you place an order at 11 am, you do not get the price you saw at 11 am. You get that day's closing NAV, provided your money reached the fund before the applicable cut-off time. Miss the cut-off, or have your payment clear the next morning, and you receive the following day's NAV instead.
Under current SEBI rules, units are allotted based on the NAV of the day the money is actually realised by the fund, not the day you clicked submit. For a large lumpsum, that one day gap can matter.
An ETF works differently: it trades continuously on an exchange, so its market price moves through the day and can sit slightly above or below its true underlying NAV.
A worked example
You invest Rs 6,000 in a fund with a NAV of Rs 30. You are allotted 200 units.
Two years later the NAV is Rs 45. Your 200 units are now worth Rs 9,000. Your return is not "Rs 15 per unit", it is 50%, which is the only number that lets you compare this fund against any other.
If you had instead put Rs 6,000 into a fund with a NAV of Rs 300, you would hold 20 units. If that fund also rose 50%, your holding is also worth Rs 9,000. The unit count is bookkeeping. The percentage move is the return.
The biggest myth in Indian mutual fund investing
A low NAV does not mean a fund is cheap, and a new fund offer at Rs 10 is not a bargain.
A share price of Rs 50 tells you something, because it is a claim on a specific business relative to its earnings. A mutual fund NAV tells you almost nothing, because it is simply the fund's assets divided by its units. Both numbers move together whenever anyone invests or redeems.
A fund with a NAV of Rs 800 is usually just an old fund that has compounded for twenty years. A fund with a NAV of Rs 10 is usually just a new one. Neither fact predicts anything about future returns.
The related and equally wrong belief is that a lower NAV means more units and therefore more growth. You get more units of something worth proportionally less. The arithmetic cancels exactly.
What NAV does and does not include
- Already deducted: the expense ratio, accrued daily. The NAV you see is net of fees, which is why fund costs are so easy to overlook.
- Not deducted: exit load, which is applied at redemption if you sell within the specified period, and any tax on your capital gains, which is your responsibility.
So the amount that reaches your bank account is NAV multiplied by units, minus exit load, and you settle the tax separately when you file.
Growth versus IDCW, and why the NAV differs
The same scheme shows two different NAVs for its growth and IDCW options. This confuses people, but the reason is simple.
In the growth option, gains stay inside the fund and the NAV compounds upward. In the IDCW option, payouts are made from the fund, and the NAV drops by exactly the amount paid out. You did not gain anything on payout day. Money moved from one pocket to another, and it became taxable in the process.
How to use NAV properly
Use it for two things only: to work out how many units you hold, and to track the percentage change in your investment. Judge a fund by its returns over full market cycles, its consistency, its expense ratio and its mandate. Never by the absolute size of its NAV.