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What is NAV (Net Asset Value)?

Net asset value (NAV) is the value of an investment fund that is determined by subtracting its liabilities from its assets. The fund's per-share NAV is then obtained by dividing NAV by the number of shares outstanding.

 

The meaning of NAV (Net Asset Value) in mutual funds, how it’s calculated, and why it matters for your investments. Learn how factors such as market trends, dividends, and expenses influence NAV, and how it affects SIP investments, fund performance, and your decisions to buy or sell.

 

Introduction to NAV (Net Asset Value)

Net asset value (NAV) is the value of an investment fund that is determined by subtracting its liabilities from its assets. The fund's per-share NAV is then obtained by dividing NAV by the number of shares outstanding.

NAV, or Net Asset Value, is the total value of a mutual fund's assets after deducting its liabilities, divided by the number of outstanding units. It reflects the per-unit price of a mutual fund, showing how much each unit is worth at the end of a trading day.In the context of mutual fund investments, NAV is crucial because it helps you understand the current value of your investment. A higher NAV indicates a fund's good performance over time, but a lower NAV can mean an opportunity for future growth, especially when you start investing. NAV allows you to track the fund’s performance and decide the best time to buy or sell

 

Understanding How NAV is Calculated

NAV Formula

Example calculation of NAV to demonstrate how it works in practice.

NAV, or Net Asset Value, is calculated using a simple formula:

NAV Formula:
                NAV =   Total Assets - Total Liabilities​

                             Number of Outstanding Units

Example Calculation:
Imagine a mutual fund with total assets of NPR 10,000,000 and total liabilities of NPR 500,000. If there are 100,000 units issued, the NAV would be:

NAV= 10,000,000−500,000   =  9,500,000  = 95

                   100,000                     100,000

So, the NAV per unit would be NPR 95. This value tells you the per-unit price for investing or redeeming from the mutual fund.

 

Factors That Influence NAV

Market Performance:

Changes in the value of a mutual fund's underlying assets, such as stocks and bonds, directly impact the NAV. If the market value of these assets increases, the NAV will rise, resulting in a gain in the fund's overall value. Likewise, if the value of these assets falls, the NAV will decrease, indicating a drop in the fund's performance. This is why NAV can fluctuate daily, as it changes to market trends and economic factors.

Dividends and Capital Gains: 

When a fund pays out dividends or profits to investors, the NAV goes down because money is taken out of the fund. If those earnings are reinvested, the NAV stays the same, but you end up owning more units.

Fund Expenses: 

Management fees, operating costs, and other expenses are deducted from a fund's assets, which lowers the NAV. These costs cover things like professional management and administrative services, so the more a fund spends on expenses, the lower the NAV will be and vice versa.

 

Importance of NAV for Investors

 NAV is important for investors because it will assist in valuing mutual fund units. When you are trading the price of your units can be determined from the NAV in which the price is a reflection of the end of trading day price. Nevertheless, an increase or decrease in the NAV does not always paint a true picture of fund performance. For example if the NAV goes down, it might seem like a bad sign, but it could just be due to market changes that happen from time to time. It's important to consider the overall performance of the fund and its long-term goals rather than focusing only on the NAV to understand how well the fund is doing

 

Daily NAV 

The Daily NAV shows the price of each mutual fund unit at the end of each market day. It’s calculated by taking the total value of the fund's assets, subtracting expenses, and dividing by the number of units. This helps you see the current price if you want to buy or sell.

Weekly NAV 

The Weekly NAV shows the value of each mutual fund unit at the end of the week. It’s calculated like the Daily NAV but updated weekly, giving a clearer view of weekly performance trends

NAV vs Market Price 

How NAV Impacts SIP Investments

In a Systematic Investment Plan (SIP), the NAV decides how many units you get each time you invest. When the NAV is lower, your money buys more units, so you get a bigger piece of the fund. When the NAV is higher, you get fewer units because the price increases. This way, over time, you average out the cost of your investment, which helps you handle market ups and downs.

NAV vs Fund Returns

NAV shows the value of a fund’s assets, but it doesn’t include dividends, capital gains, or reinvestments. These can affect your total returns even if the NAV doesn’t change. For example, in a SIP, your returns depend on both the NAV and any reinvested earnings, which help your investment grow.

NAV and Dividends in Mutual Funds

When a mutual fund pays out a dividend, the Net Asset Value (NAV) of the fund goes down by the amount of the dividend. For example, if the NAV is 100 and the fund pays a dividend of 5, the NAV will drop to 95 after the dividend is given out. Even though the NAV drops, it doesn’t mean you lose money because the dividend is paid to you or can be used to buy more units of the fund.

 

Frequently Asked Questions (FAQ)

1. What happens if NAV goes down?
If the NAV goes down, the value of your investment decreases, but it might be a good time to buy more units at a lower price.

2. How does NAV affect my investment?
NAV determines the current value of your mutual fund units, impacting both your buying and selling decisions.

3. How often is NAV updated?
NAV is updated daily at the end of the trading day (in case of Open ended Mutual Fund and weekly in case of closed ended Mutual Fund Scheme) to reflect the latest market value of the fund’s holdings.

4. Is a higher NAV better than a lower NAV?
A higher NAV indicates the fund has grown, but a lower NAV doesn't mean a bad investment; it might provide more growth potential.

5. How to calculate NAV of a mutual fund?
NAV is calculated by subtracting total liabilities from total assets and dividing by the number of outstanding units.

 6. How to check NAV of a mutual fund?
You can check NAV on the fund's website, financial news portals, or investment platforms.

7. Should you invest in an MF with a high NAV?
High NAV doesn't mean it's expensive; it shows the fund's performance over time. Focus on the fund’s strategy and returns, not just NAV.