Why NAV matters ?

A very basic yet an extremely important topic that underlies mutual fund valuation is the Net Asset Value (NAV). As an investor in mutual funds, it is recommended that one does a periodic review of the fund’s NAV and other performance parameters. 

A very basic yet an extremely important topic that underlies mutual fund valuation is the Net Asset Value (NAV). The corpus collected from the public by the mutual fund company is invested in a wide array of securities by the fund manager. The value of the investment changes every time the market value of the underlying securities change. It, thus, becomes essential to determine the market value of investments so as to arrive at the price per unit of the fund, more commonly referred to as its NAV. In other words, the investors’ share in the fund is denominated in terms of units and the value of one unit is its NAV.

Let us consider an example. TM Mutual Fund collects INR 100 million by issuing units of INR 10 each. Thus, when the fund begins its operations, it has 1,00,00,000 units of INR 10 each. The fund manager creates a portfolio by investing in the following securities :

Equity shares of INR 45 million

Gilt securities of INR 30 million

Debentures of INR 15 million

Money market instruments of INR 10 million

The total value of investment is thus INR 100 million. 

This fund is scheduled to reopen for repurchase and fresh sale after 30 days. Let us assume that the market value of investments at the end of 30 days from now is as follows:

Equity shares of INR 65 million

Gilt securities of INR 28 million

Debentures of INR 12 million

Money market instruments of INR 10 million

During this period, the fund also incurs certain expenses and earns some income. Let us assume that during these 30 days, the accrued expenses were INR 1,00,000 and the accrued income is INR 1,35,000. The level of current assets and current liabilities were INR 4,00,000 and INR 3,00,000 respectively. 

Thus, to calculate NAV of the fund, the net assets of the fund will be calculated as follows:

Market value of investments + current assets and other assets + accrued income – current and other liabilities – accrued expenses.

In the example above, Net assets of the fund = 11,50,00,000 + 4,00,000 + 1,00,000 – 3,00,000 – 1,35,000 = INR 11,50,65,000

Thus the NAV = INR 11,50,65,000 / 1,00,00,000 units = INR 11.5065

Mutual funds’ NAV are determined once a day after the stock market closes at 3.30 pm. Hence, the NAV of any mutual fund changes daily. All the reported NAVs are based on the last closing prices of the stocks. 

People generally tend to attach a lot of importance to the fund’s NAV. However, one needs to know that a new fund’s NAV will always be lower than the older ones. Hence, investors in newer mutual funds should not corroborate the misconception that investment in a relatively lower NAV has been a value buy. Instead the investors should consider various characteristics of a mutual fund rather than focusing on its NAV alone such as its Assets Under Management (AUM), fund manager’s experience, investment strategy, past performance of the fund etc. 

As an investor in mutual funds, it is recommended that one does a periodic review of the fund’s NAV and other performance parameters.