The world of investing and financial markets tends to be brimming with new terminology, especially for investors just starting out in their investing journey. When you as an investor start exploring mutual funds, you'll likely come across the term "NAV" (Net Asset Value). Unlike stocks, where you directly purchase shares based on the company's market price, mutual funds deal in units, and the price of these units is determined by the NAV.
This article looks into understanding NAV, its calculation, and how it reflects the performance of your chosen mutual fund. We'll clear up any misconceptions and ensure you have a solid foundation for making informed investment decisions.
What are Mutual Funds?
Mutual Funds are professionally managed investment vehicles that pool money from multiple investors to buy a basket of securities like stocks, bonds, or a combination of both. They offer diversification, lower investment minimums, and are professionally managed by experienced fund managers who research and make investment decisions on your behalf.
What is a Mutual Fund NAV?
NAV, which stands for Net Asset Value, is a crucial concept in understanding the worth of your investment in a mutual fund scheme. It essentially represents the price per unit of the scheme on a specific date. This price is directly tied to the performance of the scheme's underlying investments – stocks, bonds, and other securities.
Example:
Imagine a mutual fund scheme has a total market value of its holdings (Assets - Liabilities) amounting to ₹200 lakh. If the scheme has issued 10 lakh units of ₹10 each to investors, the NAV per unit can be calculated as follows:
NAV per unit = ₹200 lakh (total market value) / 10 lakh units = ₹20 per unit
Key Points to Remember:
NAV reflects the per-unit value of the mutual fund scheme, not the total value of all its assets.
Since the market value of the underlying securities fluctuates daily, the NAV of a scheme also changes on a day-to-day basis.
You can find the NAVs of your invested schemes readily available on the websites of the mutual fund companies and the Association of Mutual Funds in India (AMFI). Daily NAV updates ensure transparency for investors.
NAV vs Market Price:
It's important to distinguish NAV from the market price. Unlike stocks that trade throughout the day, NAV is calculated only once daily, typically at the close of the market. The market price at which you can buy or sell units may differ slightly from the NAV due to factors like bid-ask spread.
Calculation of Mutual Fund NAV
The calculation of NAV is a straightforward process based on the following formula:
NAV = (Total Assets - Liabilities) / Number of Outstanding Units
Here's a breakdown of the components:
Total Assets: This includes the market value of all the securities held by the fund – stocks, bonds, cash holdings, etc.
Liabilities:Â These represent any expenses incurred by the fund, such as management fees or administrative costs.
Number of Outstanding Units:Â This signifies the total number of units currently held by investors in the scheme.
Example:
Let's assume a mutual fund scheme has the following:
Market value of stocks and bonds: ₹100 crore
Cash holdings: ₹5 crore
Liabilities (expenses): ₹2 crore
Number of outstanding units: 10 crore
NAV Calculation:
(₹100 crore + ₹5 crore - ₹2 crore) / 10 crore units = ₹10.8 per unit
Therefore, the NAV of the scheme in this example is ₹10.8 per unit.
Frequency of NAV Calculation
In contrast to stocks, whose prices fluctuate constantly throughout the trading day based on market activity, NAVs for mutual fund schemes are determined at a specific point in time. As per SEBI Mutual Fund Regulations, NAVs are declared only once daily, at the close of the market.
This approach ensures a standardized valuation for all investors. Units of most mutual fund schemes (excluding Liquid and Overnight Funds) are allotted based on the prospective NAV. This refers to the NAV that will be declared at the end of the trading day, calculated using the closing market value of the fund's underlying securities.
Important to Note:
Mutual funds might accept purchase applications even after the cut-off time for that day's NAV. However, in such cases, the applicable NAV will be the one declared at the close of the next business day.
Cut-off time rules also apply to redemption requests. This means the redemption price you receive will be based on the NAV prevailing on the day your redemption request is processed, not necessarily the day you submitted it.
How is the Applicable NAV Determined?
The NAV you use for purchase or redemption depends on the transaction type and the scheme category (Liquid/Overnight Funds vs. All Other Schemes). Here's a breakdown:
Purchase:
Scheme Category | Cut-off Time & Fund Availability | Applicable NAV |
Liquid/Overnight Funds | Up to 1:30 PM, funds available by 1:30 PM (no credit facility) | Previous business day's closing NAV |
Liquid/Overnight Funds | After 1:30 PM, funds available same day (no credit facility) | Next business day's closing NAV |
Liquid/Overnight Funds | Any time (before or after 1:30 PM), funds not available by 1:30 PM (requires credit facility) | NAV of the day funds become available |
All Other Schemes | Up to 3:00 PM, funds available by 3:00 PM | NAV of the day the application is received |
All Other Schemes | After 3:00 PM, funds available | Next business day's closing NAV |
All Other Schemes | Any time (before or after 3:00 PM), funds not available by 3:00 PM | NAV of the day funds become available (before 3:00 PM cut-off) |
Redemption:
Scheme Category | Cut-off Time | Applicable NAV |
Liquid/Overnight Funds & All Other Schemes | Up to 3:00 PM | NAV of the day preceding the next business day |
Liquid/Overnight Funds & All Other Schemes | After 3:00 PM | Next business day's closing NAV |
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Key Points:
The cut-off time for availing the same-day NAV applies to both purchases and redemptions.
Liquid and Overnight Funds have an earlier cut-off time (1:30 PM) compared to other scheme categories (3:00 PM).
Ensure your funds are available by the cut-off time to avoid being assigned the next business day's NAV.
NAV & Transaction Processing Time:
An important point to note is that there's a time lag between placing an order and the actual purchase or redemption. This means the final NAV used for your transaction may differ slightly from the NAV displayed at the time of order placement.
What is Sale and Redemption Price?
Understanding the difference between the sale and redemption price is crucial for navigating mutual fund transactions. Here's a breakdown:
Sale Price:
This is the price you pay per unit when you invest in a mutual fund scheme (subscription) or switch units from another scheme within the same fund house.
Entry Load Abolition:Â SEBI regulations have eliminated entry loads for all mutual fund schemes.
New Fund Offer (NFO):Â During the initial launch period (NFO), the sale price per unit is typically equal to the face value specified in the scheme's information documents (SID and KIM).
Ongoing Offer:Â After the NFO period, you can purchase units at the prevailing NAV, meaning the sale price becomes equivalent to the applicable NAV on the date of your investment.
Redemption Price (Repurchase Price):
This is the price per unit at which the mutual fund repurchases your units when you redeem your investment or switch them to other schemes within the fund house.
Exit Load:Â Unlike entry loads, exit loads may still apply in certain scenarios. The redemption price will factor in this exit load, if applicable.
Redemption Price Calculation:Â The redemption price is calculated by multiplying the applicable NAV by (1 minus the exit load, if any).
Example: If the NAV is ₹10 and the exit load is 2%, the redemption price would be ₹10 * (1 - 0.02) = ₹9.80.
Important Considerations:
The mutual fund company (AMC) or trustee has the authority to adjust existing exit load structures or introduce new ones, subject to regulatory limits.
Any changes in the exit load structure apply only to future investments and won't affect existing units you hold.
SEBI regulations mandate that open-ended schemes cannot offer a repurchase price (redemption price) lower than 95% of the NAV.
Closed-ended schemes, unlike open-ended ones, don't allow for premature repurchases (redemptions) before their maturity date.
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NAV and Fund Performance
NAV reflects the overall performance of a mutual fund scheme. As the value of the underlying investments in the fund increases (or decreases), the NAV follows suit. Here's a breakdown of the relationship:
NAV Increase:Â If the market value of the securities held by the fund rises, the NAV will correspondingly increase. This indicates a potential gain for investors holding units in the scheme.
NAV Decrease:Â Conversely, if the market value of the underlying investments falls, the NAV will decrease. This reflects a potential loss for investors, though it's crucial to remember that NAV fluctuations are part of the investment cycle in equity-oriented funds.
Mutual Fund NAV Vs Stock Prices
There are some key differences between NAV and stock prices:
Frequency of Calculation:Â NAV is calculated daily for open-ended funds, whereas stock prices fluctuate throughout the trading day.
Underlying Assets:Â NAV represents the value of a basket of investments, while a stock price reflects the value of a single company.
Transparency:Â NAVs are readily available and published daily. Stock prices are publicly traded and constantly changing.
Investment Process:Â You can buy or sell mutual fund units at the NAV, while stock prices depend on market demand and supply.
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Conclusion
NAV provides a snapshot of the per-unit value of your mutual fund investment, reflecting the performance of the underlying assets. Understanding its calculation, how it reflects performance, and its limitations empowers you to make informed investment decisions. Remember to speak to your financial counsellor before making any investment decisions in relation to NAVs, as a counsellor can guide you and your overall investment strategy, making sure it is tailored to your own personal requirements and risk tolerance.
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