Understanding Net Asset Value: How It Affects Your Mutual Fund Investment

Mutual funds are known for the good returns they offer. However, for successful mutual fund investments, one should familiarise themselves with all key concepts and terms. Among the many mutual fund terms, a vital one is Net Asset Value (NAV). NAV is a crucial concept that helps investors understand the value of their investments.

Table of Content

• What is Net Asset Value (NAV)?
• How to Calculate NAV?
• Why Consider NAV Before Making Any Investment Decision?
• Factors Affecting Net Asset Value
• Conclusion

In this blog, we will understand Net Asset Value (NAV), exploring its importance and how it can affect your investment decisions.

What is Net Asset Value (NAV)?

Before we tell you the meaning of Net Asset Value (NAV), let's understand how mutual funds work. Mutual funds pool money from investors like you and use it to invest in various assets, such as stocks, bonds, or other securities. In return, they issue units to investors, similar to shares in the stock market.

Net Asset Value or NAV of a mutual fund is the per-unit market value of all its investments minus its liabilities. Essentially, it's the price you pay to buy or sell each unit of the fund. NAV is calculated daily, giving you an up-to-date value of your investment. This value determines the cost of your investment, the amount you receive when selling, and ultimately, your investment's profits.

How to Calculate NAV?

Are you wondering how to calculate the NAV of mutual funds? Then you would be happy to know that NAV calculation is not a complex process, but rather a simple one if you have the right data at your disposal. Here is the formula for calculating NAV for mutual funds:

NAV = (Total Assets in the Scheme – Total Liabilities in the Scheme) / Total Units Outstanding

Here is an example: Suppose a mutual fund has total assets worth INR 100 million, total liabilities of INR 10 million, and INR 9 million outstanding units, the NAV would be calculated as:

NAV = (100 million - 10 million)/ 9 million = INR 10.00

Suggested Read: Calculating Average Returns on Mutual Funds: Key Factors and Methods

Why Consider NAV Before Making Any Investment Decision?

Here are some reasons why you should consider NAV before making any mutual fund investment decisions:

Reflects Funds Future Performance

A mutual fund's NAV reflects its performance over a given period. Generally, a higher NAV suggests that the fund's investments have appreciated in value, indicating potentially b performance. On the other hand, a lower NAV may indicate that the fund's investments have depreciated, potentially suggesting weaker performance.

Help Compare Different Funds

Comparing the performance of different mutual funds is crucial for you to make informed investment decisions. Net Asset Value (NAV) offers a convenient benchmark for comparing the performance of various funds.

Affects the Cost of Investment

The Net Asset Value (NAV) represents the value of each individual unit of a mutual fund. So, essentially, by simply multiplying the NAV by the number of units you hold, you can determine the current value of your investment in the fund.

Shows the Value of Investment

NAV directly influences the cost of investing in a mutual fund. A higher NAV translates to a higher cost per unit, while a lower NAV means a lower cost per unit. By carefully considering the NAV, investors can make informed decisions about when to enter or exit the fund.

Factors Affecting Net Asset Value

Here are some factors that can influence the NAV of mutual funds:

Market Volatility

Market fluctuations and volatility can significantly impact the value of a mutual fund's underlying assets. For example, a stock market downturn can lead to a decline in the NAV of even the highest-performing mutual funds.

Expense Ratio

The expense ratio is a fee charged by a mutual fund company for managing the fund's investments. This fee is deducted from the fund's assets before the NAV is calculated. This is why a higher expense ratio can negatively impact the fund's NAV, potentially reducing returns for investors.

Fund Inflows and Outflows

The buying and selling of mutual fund shares directly impacts the fund's assets. When more investors buy shares than sell, there will be an increase in the size of the assets, generally leading to a rise in the Net Asset Value (NAV). Conversely, when more investors sell their shares, it decreases the value of its assets, which typically results in a decline in NAV

Exit Load

Some mutual funds charge an Exit Load when an investor sells their units. This fee is deducted from the NAV at the time of redemption, reducing the amount received by the investor. Exit Loads can impact overall investment returns, especially for short-term mutual fund investments.

Conclusion

As we conclude, it's clear that NAV plays a critical role in your mutual fund investments. By understanding its implications, you can make informed decisions, track your portfolio's performance, and potentially optimize your investment returns.

Ready to invest? Muthoot Finance offers a diverse range of well-managed mutual funds, designed to align with your financial goals and risk tolerance. So, start your investment journey with us today and secure your financial future!