What Is Net Asset Value (NAV) and How Is it Calculated?

NAV or Net Asset Value represents the per-unit market value of a Mutual Fund. It is calculated daily by deducting total liabilities (expenses) from total assets (investments) and dividing the result by the number of outstanding units. NAV determines the price at which investors buy or sell fund units.

This blog explains what is NAV in Mutual Funds, its formula and calculation in detail.

What Is NAV?

NAV helps investors decide which investments to hold or withdraw from their portfolio by serving as a reference value. NAV is disclosed daily on the websites of Asset Management Companies (AMCs) and the Association of Mutual Funds in India (AMFI), as required under SEBI regulations.

What Is the Formula for Net Asset Value?

The NAV calculation follows a standard framework:
Net Asset Value = (Total Assets – Total Liabilities) ÷ Total Outstanding Units

Total Assets typically include:

• Market Value of Investments: The closing value of stocks, bonds, government securities, and other portfolio holdings.
• Cash and Cash Equivalents: Bank balances and highly liquid, short-term instruments.
• Receivables: Other amounts owed to the fund, such as pending subscription amounts.
• Accrued Income: Interests and dividends earned but has not yet received.

Total Liabilities typically include:

• Expenses: Management, custody, registrar, and other operational costs (expense ratio).
• Payables: Pending redemption amounts and other outstanding liabilities.
• Taxes: Applicable tax obligations

How Is Net Asset Value Calculated?

There are two ways NAV is calculated:
1. Daily NAV Calculation: Mutual Funds value their portfolios at the end of each trading day using that day’s closing prices. Expenses are then deducted to arrive at the end of the daily NAV.

2. General NAV Calculation: This reflects the per-share value of an asset, calculated from the total value of its underlying holdings. It changes with market movements.

How NAV Is Relevant for Investors?

Calculating NAV helps investors make informed investment decisions in several ways:

• Investment Value: NAV reflects the fund’s current value, helping investors assess the worth of their holdings.
• Cost Averaging: For SIP investors, NAV helps average purchase costs over time by buying more units at lower NAVs and fewer at higher ones.
• Performance Tracking: Changes in NAV over time indicate how a fund is performing, alongside its strategy and objectives.
• Risk Insight: NAV fluctuations reveal the fund’s volatility, helping investors gauge its risk level.

Role of NAV in the Performance of a Mutual Fund

The Net Asset Value (NAV) is a key metric calculated daily that reflects the per-unit market value of a Mutual Fund’s underlying assets. While NAV determines the price at which investors buy or redeem fund units, its absolute value whether high or low does not indicate future performance. Instead, it is the percentage change in NAV over time that highlights a fund’s historical growth and the effectiveness of its fund management.

How Is NAV Different from Market Price?

NAV (Net Asset Value) represents the per-unit value of a mutual fund scheme based on its underlying assets and liabilities. For open-ended mutual fund schemes (investment schemes) that allows investors to buy or sell units at any time at the prevailing Net Asset Value (NAV), without a fixed maturity date), purchases and redemptions are processed at the declared NAV, subject to applicable cut-off time rules.

However, in the case of Exchange Traded Funds (ETFs), units are listed and traded on stock exchanges. While ETFs also publish a daily NAV, their traded price on the exchange may differ slightly from the NAV due to demand and supply conditions. This difference is known as a premium (when market price is higher than NAV) or a discount (when market price is lower than NAV).

NAV is a calculated valuation, whereas market price in ETFs is determined by exchange trading activity.

What Is Cut-Off Time and Applicable NAV?

SEBI prescribes cut-off timing rules that determine which day’s NAV applies to a transaction.
For most open-ended schemes (other than liquid and overnight funds), the applicable NAV depends on the time the application is received and, in certain cases, when funds are realised. Transactions submitted before the prescribed cut-off time on a business day may be eligible for the same day’s NAV, subject to regulatory conditions. Applications received after the cut-off time are processed at the next business day’s NAV.

For liquid and overnight funds, specific timing rules apply as prescribed by SEBI.

Investors should note that NAV applicability is governed by regulatory guidelines, and actual processing depends on compliance with submission timelines and fund realisation requirements.