Mutual fund net asset value calculation: What does it mean if a scheme's NAV is ₹100, ₹200 or ₹1,000?

If you are investing in a mutual fund scheme or researching to start your investment journey through mutual funds, you must have come across the term: NAV (Net Asset Value). While this term indicates the price of one unit of a mutual fund scheme, it is often misunderstood by investors.

For instance, there is often a misunderstanding among new investors that a small NAV of a scheme means it is cheaper and a bigger NAV means it is costlier. Many investors even ignorantly choose to invest in a scheme with a lower NAV, thinking it to be attractive due to a low price. Both of these situations and thinking are wrong and may even be harmful for the investor in the long run. This article will help you understand the real meaning of the NAV of a mutual fund scheme and also provide an example of how it is calculated.

What is NAV?

Net asset value (NAV) is the price of a unit of a mutual fund scheme. It denotes the performance of the scheme, indicating the price at which investors buy or redeem mutual fund units.

NAV of a mutual fund scheme is calculated daily as per the rules and regulations of the Securities and Exchange Board of India (SEBI).

How is NAV calculated?

The NAV of a fund is calculated by dividing the net assets of a mutual fund scheme by the total number of outstanding units on any particular date. The net assets can be calculated by reducing total liabilities from total assets. Let's understand with an example:

Let's assume the total assets of a mutual fund scheme are worth ₹1000 crore and its total liabilities are ₹50 crore. Also, the scheme has 10 crore outstanding units.

First, we need to calculate net assets.

Net asset = Total asset - total liabilities = ₹1000 crore - ₹50 crore = ₹950 crore.

NAV = Net assets/total outstanding units = ₹950 crore/10 crore = ₹95

What does an NAV of 100, 200 or 1000 mean for you?

NAV of a mutual fund scheme changes every day due to changes in the market price of securities in which it has invested. Mutual funds are required to disclose the NAVs of their schemes daily.

NAV of ₹100, ₹200, ₹1000, or any other amount can give investors an idea about how a mutual fund scheme has performed over the long term. For instance, a current NAV of ₹100 indicates the fund's net asset value has increased 10 times from the initial ₹10. Over a timeframe, investors can use the starting and current NAVs to calculate various types of returns, such as rolling returns, CAGR, absolute returns, etc.

However, NAV doesn't say anything about the quality of a mutual fund scheme or its suitability for an investor's particular financial goals.