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FundsIndia explains: What is NAV?

Ever wondered what all that jargon in fund factsheets or application forms or articles on investments mean? To make it easier to understand the world of investing, we are starting a weekly column explaining basic concept and terms.

Let’s start off with the one of the most common terms in mutual funds – the NAV or the Net Asset Value. For many, the first question that pops into your mind is what the NAV of the fund is. But unless you know what exactly the NAV is meant for, you may wind up basing your decisions entirely on the NAV number – a mistake. Here’s what you should know about NAV.

What is it? When you invest in a fund, you buy what are called units in the scheme. If you invested Rs 10,000 in a scheme, you will receive units worth Rs 10,000. Now, how does the fund figure out how many units to allot to you?

That is determined by the Net Asset Value or the NAV of the fund. NAV is the per-unit value or per-unit price of a particular mutual fund scheme. Continuing the example above, if the NAV of your scheme is Rs 20, you will receive 500 units (i.e., 10,000/20) of the scheme. If the NAV was Rs 50, you would receive 200 units.

How is is calculated? The NAV is arrived at by dividing the total market value of the portfolio by the number of units. The NAV is after factoring in the expense ratio – that is, all fund-related expenses are netted out and the resultant value is taken to derive the NAV.

Why is it useful? The NAV reflects the value of the securities in the portfolio. It is influenced by the market price of the securities in the portfolio and how much of the security the scheme holds. The change in NAV over a period will tell you what the fund’s gain or loss is.

So if the NAV of a fund has moved from Rs 10 to Rs 15 in a year, it has gained 50% for the year. The NAV is also the figure used to arrive at the number of units allotted to you. Unit allocation is a tool used to make it easier for the AMC to account for investments.

The inevitable conclusion most people draw is this – a higher NAV means the fund is more expensive than a fund with lower NAV, and a lower NAV is good because you get more units. Wrong.

In a mutual fund, what matters is the value of your investment and not the number of units you have.

Here is an example. Look at the table below. You have three funds, all with different NAVs. Let’s say you put Rs 10,000 in each, three years ago. You have the highest number of units in UTI Equity and the least in Franklin India Prima Plus. If you used the logic that lower NAVs are better because its cheaper, UTI Equity should have been your best bet. But look at the value of the holding at the end of the three years and the absolute gain you made on each of the funds. nav basics
You made the most money on Franklin India Prima Plus, which had the highest NAV. UTI Equity had a lower NAV than Franklin India Prima Plus, but your gains were smaller. Before you conclude that a higher NAV is better, look at DSP BR Top 100. It has a higher NAV than UTI Equity, but it left you with less money than UTI Equity.

As you can now understand, there is no connection at all between the absolute NAV number and your returns.

Remember this – in a mutual fund, what you are buying is the performance. Therefore, it is the extent or percentage of increase or decrease in the NAV that is important. The absolute NAV is simply a number and completely irrelevant when it comes to deciding which fund to invest in. It is simply an accounting tool used to account for investors’ investments in a scheme.

Do let us know if you need any term explained! We’ll add it to our list!

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4 Responses to FundsIndia explains: What is NAV?

  1. Ramaneesh Bandari March 14, 2016 at 6:38 pm #

    It is said that we need to invest our surplus money into the ultra short term debt funds, and debt funds are taxable with indexation benefit if held for three years, that means if we do not held for three years the capital gains are taxable at the tax rate applicable? meaning the capital gains are added to your taxable income? Please explain, thanks

    • Bhavana Acharya
      Bhavana Acharya March 21, 2016 at 12:29 pm #

      Hi,

      Yes, if you hold any debt fund for less than three years, the gains are taxed at your applicable slab rate – ie, if you pay income tax at 10%, then your gain on debt fund will be taxed at 10%. We’ll post a blog on mutual fund taxation soon.

      Thanks,
      Bhavana

  2. Ronak March 17, 2016 at 4:21 pm #

    Thanks for initiative.

    Will appreciate if you can explain the concept and risk-benefit analysis of insurance pension plans and monthly income plans?
    Thanks

  3. Ravi Kumar March 21, 2016 at 3:50 pm #

    Hi,
    When a stock belonging to an Equity MF scheme declares dividend, does its NAV rise?
    How is this dividend income from stock treated?

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