f you want to understand mutual funds, it's important to first understand NAV. NAV tells you how much a single unit of the mutual fund is worth, and it changes daily based on the performance of the investments held by the fund.
What is NAV?
NAV (Net Asset Value) is the total value of all the securities (such as stocks or bonds) a mutual fund owns, minus the value of its liabilities (expenses and debts). To calculate NAV, divide this total by the number of units the fund has issued to investors.
Example 1
Consider a mutual fund with an initial NAV of ₹200 at the start of the year. By the end of the year, the NAV rises to ₹230. This represents a 15% return on the investor’s capital. If you compare this fund to another in the same category, where the NAV increased by only 8%, the first fund seems to offer a better return. However, if the NAV increase of the first fund is significantly higher than the benchmark index (e.g., Sensex or Nifty), it could indicate that the fund took on higher risks to achieve that return.
Example 2
Four friends pool ₹1,50,000 to invest in a mutual fund, which has 15,000 units, each originally priced at ₹10.
On Day 1:
Total amount in the fund = ₹1,50,000
Total units = 15,000
NAV per unit = ₹1,50,000 ÷ 15,000 = ₹10 per unit
On Day 2:
The assets in the fund have appreciated, and the total value of the fund is ₹1,80,000.
NAV = ₹1,80,000 ÷ 15,000 = ₹12 per unit
Thus, the NAV increased from ₹10 to ₹12 per unit, a change of ₹2.
Relevance of NAV for Mutual Fund Investors
The Net Asset Value (NAV) of a mutual fund is a crucial metric for investors, as it reflects the value of the fund’s holdings per unit. It is similar to the book value of a company and provides insight into the performance of the fund. NAV is relevant for investors in the following ways:
Tracking Performance: NAV helps investors track the performance of their investments over time. For example, if a mutual fund's NAV increases from ₹200 to ₹230 in one year, it reflects a 15% return on investment for that period. This helps investors gauge the growth or decline of their investments in real terms.
Comparing Funds: Although NAV alone doesn’t provide the complete picture, it allows investors to compare the returns across different funds or categories. By evaluating the change in NAV over a specific period, investors can make informed decisions about which funds are performing better relative to others.
Performance Communication: Since mutual funds disclose their portfolios monthly, NAV provides a regular update on how the fund is performing. This helps investors stay informed about their investments and assess how well the fund is managing its portfolio in real time.
Spotting Trends: Significant changes in NAV, whether upward or downward, can act as an early warning system for investors. For example, if the NAV of an equity fund rises or falls significantly compared to the market index, it might prompt further investigation to understand the cause and decide if action is needed.
Risk-Adjusted Return: Investors can also use NAV to calculate the risk-adjusted return of a fund. Ratios like the Sharpe and Treynor ratios compare the fund’s return to its level of risk, helping investors determine whether the return justifies the risk involved.
Why is Tracking NAV Important?
Tracking NAV helps investors understand the behavior of a mutual fund. If the NAV is growing, it indicates that the fund is performing well. On the other hand, if the NAV is declining, it may suggest that the fund is losing value.
