The Net Asset Value (NAV) of a Mutual Fund is the price you pay to buy a unit of the fund. It is one of the factors that give you an idea of how the Mutual Fund has been performing over the years since its inception.

The formula to determine a Mutual Fund’s NAV is:

Net Asset Value = (Total Assets under Management- Liabilities)/ No. of Units Outstanding

Let’s say a Mutual Fund has a portfolio size of Rs.10 crores. The fund has expenses (liabilities) of about 1.5 crores and about 10 lac units outstanding. The NAV of the Fund is = Rs (10cr- 1.5cr) /10lacs = Rs85/-. Unlike stocks, the book value of the Mutual Fund is the same as its NAV.

The Factors that Determine the NAV of a Mutual Fund are:

  1. Profits earned or losses booked from the underlying investments
  2. Fund expenses
  3. The type of Mutual Fund
  4. Dividend pay-outs
  5. Investor entry or exit

Let’s understand these factors in detail:

The profits earned or losses booked from the underlying investments

When the underlying investments in a Mutual Fund book profits, the NAV of the Mutual Fund rises. In case the market falls and the fund’s underlying investment losses get booked, the fund NAV falls.

NAV changes occur when Mutual Fund managers actually realize profits or losses.

The Mutual Fund’s expenses

Mutual Funds get managed by professional asset managers for a yearly fee. These fees are referred to as “Management Fees” and get deducted from the NAV of the Mutual Fund. Management expenses reduce the NAV of a Mutual Fund and SIP Plan.

The type of the Mutual Fund- Direct or Regular Mutual Fund

A Regular Mutual Fund has a higher Net Asset Value compared to a Direct Mutual Fund. Regular Mutual Funds include extra fees payable to brokers and intermediaries who offer you the Mutual Fund. Brokers and intermediaries also give you financial advice and assist you with service-related issues.

Direct Mutual Funds are bought by you, usually online. If you are comfortable investing on your own, you can buy Direct Mutual Funds instead of Regular Mutual Funds. This way, you can enjoy a higher NAV and also save on charges.

How do Dividend Pay-outs affect the NAV of a Mutual Fund?

When a Mutual Fund pays out a dividend, the NAV of the fund reduces. Mutual Fund dividends work on a redemption basis. The amount of reduction in the NAV is directly proportional to the percentage of dividend paid out.

When you invest in a Mutual Fund Scheme, you can choose to opt for either the growth or the dividend schemes.

Investor Entry or Exit

If investors book their profits and exit the fund at a high NAV, the NAV drops for the existing investors. The reverse is also true.

When new investors enter the fund at low NAVs, the fund’s NAV decreases further for the existing investors. The NAV decreases as the number of units has now increased.

Would a Mutual Fund with a higher or lower NAV be better?

It is a common misconception that purchasing Mutual Funds with lower NAVs is a safe bet. For this very reason, people prefer to subscribe to New Fund Offers (NFOs) over investing in existing Mutual Funds. These assumptions might not always be accurate. Thus, it is ideal to check the quality of the Mutual Fund’s underlying investments, past performance and NAV of the fund before investing in it. Also, it is imperative to understand the Mutual Fund’s goal and investment strategy.