What is Net Asset Value (NAV), and how Does it Affect your Investment returns

Mutual funds are an incredible investment option. One of the important terminologies related to mutual funds is Net Asset Value. NAV provides transparency to investors as it is a clear and standardized measure of a fund’s value and performance. Though investors tend to give high importance to NAV while selecting a fund, does it really matter or is it just a myth? Let’s find out today.

Meaning of NAV

You must know how NAV works to understand NAV. According to the fund’s investment objective, the mutual fund scheme invests investors’ funds towards securities such as bonds, equities, money market instruments and others. NAV is the market value of a mutual fund scheme divided by the units of the scheme on a specific date.

You can also say that NAV is the price of each unit of the mutual fund scheme.

For instance, if you want to invest Rs.5000 in a fund and the current NAV is Rs.50, then based on the current Net Asset Value (NAV), you will receive 100 units. It is also the price of one unit you receive when you redeem your funds. So, if the NAV becomes Rs.55 at the time of redemption, you will receive Rs.5500 against your initial investment of Rs.5000.

The NAV of all mutual fund schemes is determined on a daily basis. The NAV of a mutual fund scheme usually describes how a fund has been performing lately.

Relevance for investors

As an investor, you must note that NAV does not give insights into the future potential of the fund.

Also, it is important to consider the difference between Net Asset Value (NAV) and stock price. A lower NAV doesn’t ensure it will be your best investment and vice versa. Hence, various other factors must be considered while investing in any scheme.

Does NAV affect the returns of investment?

Usually, all mutual funds are priced at Rs 10 at the beginning. Depending on the market value of the securities, NAV increases or decreases.

We know that the NAV of each MF scheme is presented at the end of each day.

When you invest in mutual funds, when the Net Asset Value (NAV) of the fund is low, you get higher units of the fund. It is because the number of units that you get depends on the investment amount and NAV.

Number of units = Investment Amount/NAV

So, if the NAV is 20 and the investment amount is ₹ 20,000, then you will get 1000 units of the mutual fund.

However, you will get fewer units when the NAV goes up.

But the NAV doesn’t have to affect the returns from your investments.

Here’s a small example that will help you to figure it out.

Let us suppose you wish to invest around Rs 10,000 in mutual funds. You have two options, i.e. Fund A (with a NAV of Rs 10) and Fund B (with a NAV of Rs 50). The portfolio of both funds is the same.

Now, you’d get around 1000 units of Fund A and 200 units of Fund B.

Let’s say that after a year, the funds experience growth of 20%. Now, the NAV of Fund A would be around Rs 12, and Fund B would be Rs 60.

Let’s say that after a year, the funds experience growth of 20%. Now, the NAV of Fund A would be around Rs 12, and Fund B would be Rs 60.

The value of your investments will be (Fund A): 1000*12 = Rs 12000.

The value of your investments for Fund B would be 200*60 = Rs 12,000.

Did you notice that your investments remain the same irrespective of different NAVs of funds with the same portfolio value? Did it make Fund B with a higher NAV any better than Fund A? Certainly not.