What Is NAV Or Net Asset Value In Simple Terms?

NAV or Net Asset Value is an important concept used in Mutual Funds, Unit Linked Insurance Plans (ULIPs), and National Pension System (NPS), etc. However, in this post, I will associate it with mutual funds. But, you can correlate it with other financial products also. It is the same for all these products.

Whenever you invest in a mutual fund, the fund house allots you a certain number of units. And, those units are calculated on NAV or Net Asset Value. Most people become confused at this point. However, in this post, I have tried to simplify the concept with a few examples and illustrations. Before that, we have to understand how a mutual fund works. Let’s start.

How A Mutual Fund Works?

The working style of Mutual funds is quite simple. For example, an investor transfers money to a mutual fund house. The mutual fund house then buys stocks from the stock market—finally, issues units to the investors.

Note: It is an example of an equity mutual fund only. However, debt mutual funds invest in bonds, and hybrid mutual funds invest in both stocks and bonds.

what is nav or net asset value
How does a equity mutual fund work?

An Example of Equity Mutual Fund’s working style

So, you hold units either in physical form or Demat form (in your Demat Account). Now, the question arises___what are these units, and how many units will you get with a certain amount of investment?

An Example

Suppose, SBI Mutual Fund launches a new scheme called SBI Nifty 100. As per the scheme’s objective, it will invest the money in the Nifty 100 index (Top 100 listed Indian Companies). Further, it collects Rs. 10 Crore from its investors through a process called NFO (New Fund Offer) and invests that money in the stock market to buy shares of Top 100 listed companies. The fund house fixes the price of each unit at Rs. 10. It means the fund house has created 1 Crore units. Once it buys the shares, it issues units to its investors.

Thus, if you invest Rs. 10,000 in the fund, you will get 1,000 units (Rs 10,000 / Rs 10 per unit). That is the NAV or Net Asset Value. Therefore, Net Asset Value or NAV is nothing but the price of one unit of a mutual fund scheme.

The Formula Of NAV Or Net Asset Value

The formula for NAV is as follows.

NAV = Fund Assets – Fund Liabilities / Total Number of Outstanding Shares

  • The assets of a mutual fund house are the market value of all the investments made in stocks, bonds, and cash positions. The value of these assets changes every day.
  • The liabilities of a mutual fund include management fees, distribution and marketing expenses, and other operational costs. We call it the expense ratio. The fund house calculates it daily.

Let’s take the example of SBI Nifty 100 and calculate its Net Asset Value.

  • The fund assets are Rs 10 Crore (9.9 Crore as investments + 0.1 Crore as cash positions). The fund house has to maintain some cash positions for liquidity purposes.
  • We will take the expenses ratio as 0.10% of total AUM (Asset Under management). Thus, 0.10% of Rs 10 Crore is Rs 1 Lakh. Further, we will divide it by 365 to get its daily expense amount. It is Rs 274 only. That is a small amount. Thus, we will not consider it while calculating the NAV in this case.
  • Finally, the total number of outstanding shares is one Crore.

NAV of SBI Nifty 100 = 10,00,00,000 / 1,00,00,000 = Rs 10.


How NAV Changes?

The NAV changes when the value of underlying asset changes. For example, the value of NIFTY 100 was 10,000 at the time of investment, and after one year, it becomes 12,000. It means those initial investments of Rs 10 Crore is now worth Rs 12 Crore. Thus, if we assume that the fund house has not created more units during the period, its NAV will be as follows.

NAV of SBI Nifty 100 = 12,00,00,000 / 1,00,00,000 = Rs 12. [I have not taken the liability in this case also as it is a small amount]

It is just an example: the NAV of a mutual fund can go up to four decimal points.

Thus, as you noticed, the value of NAV changes along with its underlying assets.

The mutual fund house creates more units when more money comes to it and destroys units when people redeem their money. For example, suppose a bank invests Rs 12 Lakh in the fund at a NAV price of Rs 12, then the mutual fund house creates 1 Lakh more units. Thus, the new equation may look like this.

NAV = 12,12,00,000 / 1,01,00,000 = Rs 12. As you have observed, there is no change in NAV price if new investors come in or existing investors pour more money. The same is valid with redemption.

Some Real Examples Of NAV

Let’s take a few real examples of NAV. I want to draw your attention to the following screenshot.

Image Source: https://www.moneycontrol.com/

It is the screenshot of the Principal Emerging Bluechip Fund. It’s NAV is Rs 102.34 as on 24 July 2020. It means if you invested Rs 10,000 in this fund on 24 July 2020, then you would get 97.71 units each unit at Rs 102.34 [Rs 10,000 / 102.34 (NAV) = 97.71 units].

Further, NAV helps you to calculate the returns. For example, take the case of this fund, if we can get its historical NAV chart, we can calculate what the fund has generated return to its investors. Let’s observe the screenshot.

Image Source: https://www.moneycontrol.com/

The NAV of the fund on 12 November 2008 was Rs 10, and today it is Rs 102.34. It means a 10x return in less than 12 years. In other words, it has generated a 22% CAGR over the period.

To take an example, if someone had invested Rs 1,00,000 in this fund in the year 2008, then the current valuation would have been Rs 10,23,400. For a comparative study, the same amount would have become slightly higher than 2 Lakh in the bank or postal fixed deposits.

Disclaimer: This example is meant for educational purposes only. It is not a recommendation. Further, I do not hold any interest in any mutual fund scheme. So, I shall not be held responsible for any of your investment decisions.

A Closing Thought On NAV Or Net Asset Value

Understanding NAV will help you to understand various financial products better. The NAV calculation is the same for a mutual fund, the Unit Linked Insurance Plans (ULIPs), or even the National Pension System (NPS).

When you buy the shares of a company, you buy on its current share price. It keeps changing during the trading hours (9.15 am to 3.30 pm) on business days. Similarly, whenever you invest in a mutual fund, you buy on its NAV price. However, it is calculated after market hours, generally on or after 9 pm. You can check the NAV of a particular fund on that specific fund house’s website or even on the Association of Mutual Funds in India.

We will discuss more on the same topic in our subsequent chapter. I hope I made simplified the concept for you. However, I will appreciate it if you share your doubts with me.

Thanks and regards,




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