Factors that Determine NAV – Importance, Misconception, Calculation & more

Know everything about the Factors that determine Nav or Net Asset Value of a Mutual Fund.

As per the rules of SEBI (Securities and Exchange Board of India), all mutual fund companies have to announce their Net Asset Values on all trading days.

So, we would discuss about Factors that Determine NAV in this article.

Mutual fund companies collect money from retail investors and invest them in various investment vehicles like stocks, bonds, assets, etc.

Generally, an Asset Management Company (AMC) divides the mutual funds into units.

Net Asset Value (NAV) represents the market value of a single mutual value. Just like shares have a share price, mutual funds have NAV.

The mutual fund’s units can begin with a cost of Rs. 10, and it rises as the assets of a fund eventually grow.

One can calculate the Net Asset Value by adding the market value of all the shares in the mutual fund and then divide it by the total number to fund units.

The resulting figure will be the NAV of the mutual fund. The Net Asset Value will not change throughout the day, and it updates at the end of each trading day.

AMCs do not update the NAV live because of complications in continuously tracking the different assets held by the fund.

Usually, a popular fund will have a higher Net Asset Value as compared to the less popular one.

But, there are numerous other factors that an investor considers, like the fund’s previous performance, AUM (Assets Under Management) size, etc., before choosing the mutual fund.

Factors that determines NAV of a Mutual Fund

Several factors can affect the Net Asset Value of a mutual fund. These include:

Profits Gained or Losses Incurred from the Investments

Depending on the market conditions, the NAV can rise or fall. The Net Asset Value will increase when the value of the corpus increases or the underlying investments of the fund book profits.

During a market fall, as the price of the stocks held by equity funds will fall, the Net Asset Value will also go down.

The impact on Net Asset Value is more when the assets with bigger weight fall in value. This is called a heavyweight.

Smaller weight assets do not have a profound impact on the Net Asset Value of a fund.

This is major factor that determine the NAV of any Mutual Fund.

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Type of Mutual Fund

Investors can choose from direct and regular mutual funds while investing.

In regular mutual funds, investors have to pay extra fees for the presence of financial intermediaries, while there is no such thing in direct mutual funds.

The intermediaries give you financial advice and assist you with service-related issues.

Because of these intermediaries who receive a part of your profits, the Net Asset Value is lower in regular mutual funds when compared to the direct ones.

Expenses of Mutual Fund

One of the Major Factor that determine the NAV or Net Asset value of a Fund is Expenses of Mutual Fund.

When an Asset Management Company manages a fund and its investments, it charges a commission from the investors known as management fees.

This management fee includes the cost of hiring professional investment advisors, customer services, office supplies, administrative fees, etc., which gets deducted from the NAV of a mutual fund.

Hence, investors also have to consider the number of management fees that will reduce their Net Asset Value.

Dividend Pay-Outs of a Mutual Fund

A dividend is the investor’s portion of the mutual fund company’s profits.

When the companies held in the fund’s investment declare dividends, then these dividends add to the corpus value of your fund.

A larger corpus value will slowly lead to an increase in the Net Asset Value of your fund.

However, when a mutual fund pays out dividends, the shareholder receives either additional shares or a fraction of the additional shares in cash.

This reduces the Net Asset Value, but the total value of the investment remains the same for the investor.

Entry or Exit of an Investor

If an investor exits from a mutual fund when he/she books profits at a higher NAV, the Net Asset Value drops for the existing investors.

When new investors enter the fund at a low NAV, then also the Net Asset Value will further decrease for the existing investors because the number of units has now increased.

If an investor exits the fund at a lower NAV, then the Net Asset Value will increase for the other investors.

For example, if you buy at Rs. 10 and then exit at Rs. 7, the lesser value has gone out, but the same number of units has exited the fund.

This increases the NAV for the fund’s loyal investors.

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Why is Net Asset Value Important?

Although there are many common misconceptions about the importance of the NAV, there are many uses of calculating the Net Asset Value for an investor.

The calculated figure of the Net Asset Value helps the investors to analyze and assess the number of units he/she can buy in a certain scheme.

It also helps the investors in calculating the profits and redemption amount of investment.

The Net Asset Value aids an investor to assess the overall performance of a scheme for a particular period of their choice.

To see how well or how poorly the fund has performed, an investor can compare the Net Asset Value at two different times and then analyze.

Misconceptions about NAV of a Mutual Fund

There is a popular perception that purchasing mutual funds will lower NAV is a safer bet or cheap. This is not completely true.

In the case of mutual funds, the things that matter the most is the quality of your portfolio and the underlying investments of your scheme.

The quality of your fund’s portfolio determines the potential of growth of the fund’s Net Asset Value.

It is also extremely important to understand your ultimate goal from the fund and the fund’s investment strategy.

If you check the Net Asset Value of your fund and the price at which you redeem the fund, it will be slightly different.

This is because of the exit loads imposed by funds if you redeem the funds before a certain period.

Also, when you sell your equity funds, you’re liable to pay the Securities Transaction Tax (STT).

So, if you have invested in equity funds and exited before the set period of the company, they can deduct both STT and exit load from your reduction amount.

There is no STT in the case of non-equity funds.

How to Calculate Net Asset Value of a Mutual Fund?

To understand the Factors that determine NAV of Mutual Fund, it is important to know how Net Asset Value of Mutual Fund get Calculated –

General NAV Calculation

Consider an example. Accordingly, you will have to pay Rs. 500 for each unit you buy from that fund.

In case you have Rs. 5,000 to invest, then the company will provide you 10 units of that fund. The cost of an equity fund is generally the total cost of all the shares it has.

This cost is subject to price fluctuations due to constant changes in the market.

Daily NAV Calculation

All mutual fund companies evaluate the worth of their portfolios around 3:30 p.m. each day.

The fund house is also responsible for deducting the liabilities and expenses in the calculation of the Net Asset Value.

Assets of a mutual fund include both securities and liquid cash. A simple formula that can explain the process of calculation is:

Net Asset Value= [ Assets – (Liabilities + Expenses) ] / Total Number of Units

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Factors that determine NAV – Conclusion

Usually, many investors consider the Net Asset Value to be almost irrelevant.

The NAV is just the total value of mutual fund scheme investments minus liabilities and expenses. It does not even reflect the prospects of the mutual fund.

In fact, there are many instances of investors selling their old mutual fund units to invest in newer units.

It is because of the perception of lower Net Asset Value being better. But, no two mutual funds are ever the same.

Basically, the Net Asset Value shouldn’t be the only factor on which you choose your fund.

You have to factor in several characteristics apart from the Net Asset Value to choose the right mutual fund scheme.

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