How a Mutual Fund Investor Should Interpret Net Asset Value

ET explains how a mutual fund investor should interpret net asset value:

1. What is NAV? The net asset value (NAV) represents the market value per unit of a fund. This is the price at which investors buy fund units from a fund company or sell them back to the fund house. It is calculated by dividing the total value of all of a portfolio’s assets minus all of its liabilities. The net asset value of a fund is calculated by the mutual fund house itself or by an accounting firm hired by the mutual fund.

2. When is the net asset value calculated? The calculation of the net asset value is not possible during market hours because the price of the underlying assets (eg stocks) changes every minute. The net asset value is calculated at the end of each trading day, after taking into account the closing market prices of the securities held by the fund or organisation.

3. How is the net asset value different from the price of a share? In the case of companies, the share price is listed on the stock exchange. Apart from the fundamentals, this price also depends on analysts’ view of the company’s future performance and the demand-supply scenario. Therefore, the market price of a stock is different from its book value. However, in the case of a mutual fund, there is no concept of market value for the mutual fund share. Therefore, when we buy MF shares from NAV, we buy them at book value. Right now, we are paying the fair price for assets, be it Rs 10 or Rs 50.

4. How important is net asset value to investors? When the amount of investment in different schemes is the same, NAVs are not relevant. What an investor should look closely at are the returns offered by the scheme.

5. What does low and high net asset value mean in different schemes? This issue is best illustrated with an example. Suppose we hypothetically invest in two schemes A and B. Scheme A has a net asset value of Rs 10 while scheme B has a net asset value of Rs 50. We have made an equal investment of Rs 1 lakh each in the two schemes . Scheme A would appear as a cheaper buy because we got 10,000 units versus 2,000 units in Scheme B. Now let’s assume both schemes earn 10% in a month. The Net Asset Value of Scheme A is now Rs 11 and Scheme B has a Net Asset Value of Rs 55. The value of your investment in both cases is Rs 1,10,000. Therefore, we see that the net asset value of a plan is irrelevant, as far as the generation of returns is concerned. The only difference is that in the case of scheme A, the investor obtains a greater number of units and in scheme B, he obtains a lesser number of units. For two plans with an identical portfolio and other things remaining constant, the difference in net asset value will hardly matter as long as the plans offer the same returns.

6. What do daily NAV changes indicate? The daily change in the net asset value of a mutual fund indicates an increase or decrease in plan assets. However, financial planners tell investors that when choosing a mutual fund for their investments, daily changes in the net asset value of the plan do not matter. Investors should look at a fund’s annualized return over different time periods to judge its performance.


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