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Net Asset Value (NAV) – Meaning & Calculation

Introduction

Net Asset Value (NAV) is often called the "price" of a mutual fund unit. Just as a share has a market price, a mutual fund unit has a NAV. It represents the per-unit market value of all the assets held by the scheme. Understanding NAV is essential because it determines how many units you get when you invest and how much money you get back when you redeem.

What is NAV?

NAV is the value of one unit of the mutual fund scheme.

Simple Formula:

NAV = (Total Assets - Total Liabilities) / Total Number of Outstanding Units
  • Total Assets: Market value of all stocks, bonds, and cash held by the fund.
  • Total Liabilities: Expenses payable (management fees, RTA fees, audit fees).
  • Outstanding Units: Total number of units held by all investors combined.

Example:

  • A fund has assets worth ₹100 Crores.
  • It has liabilities of ₹1 Crore.
  • There are 1 Crore units outstanding.
  • NAV = (100 Cr - 1 Cr) / 1 Cr = ₹99.00 per unit

NAV vs Stock Price

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Applicability of NAV (Cut-off Timings)

SEBI has mandated strict "Cut-off Timings" to determine which day's NAV an investor gets when they invest or redeem. This ensures fair treatment and prevents late trading.

For Liquid and Overnight Funds

  • Investment (if money received by 1:30 PM): Previous Day's NAV (Historical).
  • Investment (after 1:30 PM): Same Day's NAV.
  • Note: Money must be credited to AMC account before cut-off.

For Equity and Debt Funds (Other than Liquid)

  • Investment (if money received by 3:00 PM): Same Day's NAV (Closing NAV of today).
  • Investment (after 3:00 PM): Next Business Day's NAV.
  • Redemption (request by 3:00 PM): Same Day's NAV.
  • Redemption (after 3:00 PM): Next Business Day's NAV.

Significance: If you invest in an Equity fund at 2:00 PM on Monday, and the market crashes by 5% that day, you get the benefit of the lower NAV (more units) because you get Monday's closing NAV.

Myths about NAV

Myth: "A fund with NAV ₹10 is cheaper and better than a fund with NAV ₹100." Fact: False. NAV is irrelevant to returns.

  • Fund A (NAV ₹10) and Fund B (NAV ₹100) both invest in HDFC Bank.
  • If HDFC Bank rises by 10%, BOTH funds will rise by 10%.
  • Fund A becomes ₹11; Fund B becomes ₹110. Your percentage return is identical.
  • A lower NAV just means the fund is newer or hasn't grown as much in the past, not that it is "undervalued."

Exam Notes: Writing the Answer

Question: "Define NAV. Explain the factors affecting calculation of NAV." (10 Marks)

Model Answer:

Definition: Net Asset Value (NAV) represents the residual value of the scheme's assets per unit after deducting all liabilities. It is the price at which the AMC buys (redeems) or sells units to investors.

Calculation: NAV = (Market Value of Investments + Current Assets - Current Liabilities & Expenses) / Number of Outstanding Units.

Factors Affecting NAV:

  1. Market Movement: If prices of stocks/bonds in the portfolio rise, NAV rises.
  2. Dividend Distribution: When a fund declares a dividend, the NAV falls to the extent of the dividend paid (money moves from fund to investor).
  3. Expense Ratio: Daily deduction of management fees reduces the NAV marginally every day.
  4. Inflows/Outflows: Large inflows/outflows generally don't impact NAV per unit (as new units are created/destroyed), but they impact the Total AUM.

Cut-off Timing: For suitable applications (Equity/Debt) received before 3:00 PM, the Same Day's NAV is applicable.

Summary

  • NAV: The "Price" of a mutual fund unit.
  • Equation: (Assets - Expenses) / Units.
  • Relevance: Used for all subscriptions and redemptions.
  • Misconception: Low NAV does not mean cheap. High NAV does not mean expensive. Returns depend on portfolio performance, not NAV value.
  • Timing: Invest before 3 PM to get same-day NAV.

Quiz Time! 🎯

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