All you wanted to know about NAV mutual funds

NAV is the unit price of a mutual fund scheme. Mutual fund is bought or sold based on NAV. Unlike stock prices which changes frequently during the market hours, the NAV mutual funds is determined on a daily basis after the market closure.

NAV is computed after the market closure basis the closing prices of all the securities that is held in the mutual fund portfolio after making necessary adjustments. One must note that the scheme expenses like fund management, distribution/ marketing cost and administration expenses etc. are charged proportionately against the scheme assets and are adjusted daily in the price of the scheme known as mutual fund NAV.

During the new funds offer or NFO, a mutual fund scheme is priced at par value of Rs 10. The money mobilized from different investors, is then invested in a basket of financial securities like shares, bonds and Government securities and other assets. The fund NAV goes up or comes down depending on the market value of the securities on a daily basis. Older schemes technically should have higher NAVs as they are old. New schemes NAV will be less as they need to grow with time. In summary, older mutual funds are most likely to have higher NAVs compared to funds that are new because the prices of older funds got the time to grow.

Mutual fund NAVs are declared daily and is first published on the website. NAV mutual funds can also be found on the respective mutual fund company website.

Let us now discuss some misconceptions about NAV

Low NAVs does not mean it is cheap and high NAV does not mean expensive. The NAV is calculated from the closing value of the underlying instruments of the fund and the profits or losses which have accumulated profit made by the scheme since inception. The NAV of a mutual fund by itself should not be a consideration for making investment decisions.

A large number of investors assume that mutual fund NFOs are cheap as they are issued at par value of Rs 10. As mentioned earlier, the par value of a mutual fund unit is declared when the scheme starts the NFO, but thereafter, the value is calculated from the securities held in the portfolio and the loss/ profits accumulated since the start of the fund.

Different schemes may have different prices, yet they may have exactly the same portfolio.  One may be offered at Rs 10 while the price of the other scheme might be more than Rs 200; the difference in price notwithstanding, the intrinsic value of the both the funds is the same.

Fund which pay dividends (now known as IDCW – Income distribution cum withdrawal) do not necessarily give high returns. As per SEBI guidelines, IDCW can only be paid from the scheme profit or fund reserve. IDCW is adjusted from the scheme NAV after declaration. For example – if the scheme NAV is Rs 50 and the fund declares an IDCW of Rs 2, the fund NAV (ex-dividend) will fall to Rs 48 (Rs 50 – Rs 2), just after the IDCW is declared.

A fund NAV should not be the deciding factor in selecting a mutual fund.  The consistent track record of the fund and the fund manager’s ability to deliver alpha can only determine whether the fund can give good returns or not?

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