NAV-When choosing a mutual fund, investors frequently give too much attention to their past returns. They ignore to examine the crucial question – how much is the mutual fund deserving?

What is the NAV- Net Asset Value?

Mutual fund investments all over cost will depend on the price per fund unit. This is the Net Asset Value or NAV. If you take up the market price of all the shares in a portfolio and share it by the number of prevailing fund units, one gets the NAV. In short, the benefit of one unit by the book.

Usually, mutual funds start with a unit-cost of ₹10 and it stands as the fund’s assets under the management progress. So, a popular fund will have a greater Net Asset Value than a less successful one. This leads us to the next question. How important is the Net Asset Value when choosing a mutual fund in India ?. One needs a mutual funds overview in the correct manner. Also one should know how to invest in mutual funds.

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How NAV is a need for Investors?

Many investors usually see that a mutual fund at Rs. 15 is reasonably related to one at Rs. 20. But this is not actual research at all. If one knows why it can assist them to explain bigger and pick a fund wisely.

Investors tend to think that the Net Asset Value and the value of an equity share are identical, which is not true. For example, if both the above funds have a similar portfolio – then the NAV doesn’t create a contrast to the cost of the fund.

The benefit of Analyzing Net Asset Value 

  • The ratio of assets to liabilities can be addressed at, that serves to define the level of risk.
  • It supports to have a tab on an individual’s risk and therefore, guarantees larger risk management.
  • NAV can also emerge to suit the terms of many new kinds of investments. By its various derivations such as Absolute Return and Compounded Return and Compounded Annual Growth Rate etc.

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The formula for NAV Net Asset Value

The formula for a mutual fund’s NAV calculation is mentioned in the below :

NAV = (Assets – Liabilities) / Total number of OS
Note: Asset- A
Liabilities- L
OS- outstanding share

NAV and Market Price Difference

For a company’s shares to be ready for investors to purchase or subscribe, it needs to be placed on the stock exchange. The cost of its share is identical as that on the stock exchange. Factors like demand-supply and company’s potential also define the share price. So, the Net Asset Value will ever be different from the market price of a share.

Calculation of NAV

  • General NAV Calculation

If a mutual fund has a NAV of ₹700, then that is how much one will have to pay for one unit of that mutual fund?
Usually, if one invests ₹7000 in a mutual fund with a NAV of ₹700, then they will provide one 10 units of that fund. The cost of an equity mutual fund is the total individual cost of each share it has. These price variations are subject to modification as per the market. This is why mutual fund portfolio begins with a daily value.

NAV Importance

  • For investors

Some investors consider NAV to be an act in illusion, while others emphasise on its importance .Net Asset Value is just the price of one of the mutual fund’s units and is suggestive of the fund’s fundamental value. When one buys units in a mutual fund and best mutual fund to invest in, one buys them at NAV.

  • For Financial Planning

Mutual funds usually apply for Financial Planning. There are fitted professionals assisting investors in their financial planning. The quality of stability in financial planning is such that there is a record for the position, known as CFA.

  • For Financial Planners

Financial planning is formulated for to know the customers’ needs. Financial planners are working in on maintaining one’s investments to accomplish goals as in planning retirement, children education and many more. Keeping an understanding of contact with the customer is arguably the very necessary duty of a financial planner. It is further known as relationship management.

  • NAV Calculation: Daily

Every mutual company view their portfolio worth once the stock market finishes at 3.30 PM, every day. The market opens again the next day with the prior day’s closing share costs. The fund house decreases each payable and expense equally to determine NAV of the day practising the given formula.

Money prevailing in the bank is attached and the money payable to others deducts to learn the asset value of the fund. The fund manager also decreases the daily expenses to maintain a fund from the asset value.

One receives the day’s cost per unit when one divides entire asset value by the number of units issued so far. As the bulk of the funds are open-ended, current investments and fresh withdrawals can affect the units. If the fund manager thinks fit, he/she may put in extra sum or sell a few shares.

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The way investment timing impact NAV?

A mutual fund house in India originates its latest NAV on all working days. Due to which it is rigidly time-bound. This is why mutual funds hold a deadline for daily investments, which is usually 2 PM. Therefore, if one invests before 2 PM, they provide one of the fund units on that day’s NAV. For investments made after 2 PM, the units go to the NAV allocation of the following business day. The similarly applies for redemption too.

Valuation principle in NAV

There are other valuation techniques using which securities in every portfolio may be valued. Let’s see a few of the ideas and how the NAV of a mutual fund is affected by them.

  • Market To Market

The process of assessing all security in the investment portfolio of the scheme as its market value is called market to market. That signified the securities to their market value. As investors trade units in the scheme on the grounds of NAV. Hence NAV is supposed to be the true value of every unit in the scheme.

The investment portfolio will end up being priced at the cost at that the security was purchased if the investments are not considered to market. Mark to market ensures fair practice in trading units of a scheme when it gets to its pricing. That is in turn reliant on the NAV which is determined transparently by extorting its information which is clearly shared.

  • Sale price, re-purchase price & loads

Open-ended schemes are defined by a different feature where investors have a continuous plan to get new units. That is named as sale transaction and trade back units to the scheme that is which is named as re-purchase transaction.

Earlier, schemes were permitted to retain Sale Price Grater than The Nav. The contrast among the Sale price and NAV is named as Entry Load. Likewise, schemes were permitted to hold a re-purchase price less than the NAV. The variation between the re-purchase price and NAV is named as Exit Load.

The schemes also develop a structure which is known as Contingent Deferred Sales Charge. According to which the scheme load is set when the investors give their units for re-purchase. As per this formation, the investors get vaster benefits if one hold units for a prolonged period of time.
This kind of structure drags the investors to operate on to their units for extended periods and so give them larger scheme advantages by offering to incremented returns.

Earlier, schemes had the versatility to change among various types of investors within the same scheme, by selling them various levels of load. Moreover, all the money received as part of the entry or exit loads were ready to the Asset management company to bear many marketing expenses of the mutual fund. There were flexible limits on how much could be priced as loads.

The Sebi has made the following alteration :

  • All entry loads are banned by Sebi. This meant that as sale price and NAV needs to be equal.
  • Exit loads beating 1% of the redemption gains are mandatorily charged back to the scheme.
  • all investors described in the portfolio needs to be related to Exit load.

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Net Asset Value of a mutual fund shows how well the fund manager has set his or her chances in the market. In the state of investment in mutual funds, determining the value is a slight confusion. Here is where one can see at the idea of Net Asset Value or NAV. Thus, NAV is a very essential instrument for investors.

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