How is a mutual fund NAV calculated? Why is it important to calculate NAV in a mutual fund investment?


In case you are new to a mutual fund, the initial thing you must know is what is NAV (net asset value). NAV refers to the unit price of a mutual fund. A mutual fund is purchased or sold based on the NAV. Unlike the share price, which constantly changes during trading hours, NAV is computed daily and calculated at the end of the day depending on the securities’ closing price. The TER (total expense ratio) of a mutual fund like administration, fund management, distribution cost, etc. are levied proportionately on the scheme, which is adjusted with the fund’s NAV. 

How is NAV for mutual funds computed?

You can compute NAV by dividing the difference of the company’s assets and liabilities by its outstanding number of shares. With NAV, you can review if the mutual fund is overvalued or undervalued. So, in a mutual fund, NAV is nothing but the per-unit market value of a mutual fund, wherein you divide the fund’s net assets by its overall outstanding units. The mathematical formula to calculate NAV is – 

NAV (net asset value) = (assets – liabilities)/overall outstanding units in a fund

Here, assets involve the securities’ value held in equity, cash, debentures, exchange bills, bonds, commercial papers, dividends, or interest earned. Liabilities involve expenditures in the form of interest payable, fund management expenditures, money payable, etc. Fund managers compute the mutual fund’s NAV towards the end of a market day.

NAV computation – example

Suppose a mutual fund holds Rs 1 crore worth overall investments in various securities computed based on the market’s closing price for every asset. Also, it has Rs 6 lakh of cash equivalents and Rs 3.50 lakh in overall receivables. The accrued income for the day equals Rs 8,000. In the form of short-term liabilities and long-term liabilities, the fund has Rs 20 lakh and Rs 1.50 lakh, respectively, and the day’s expenditure is Rs 2,000. Also, the fund has an outstanding share equaling Rs 5 lakh. By using the above formula, NAV will be – 

[(1,00,00,000 + 8,000+ 3,50,000 + 6,00,000) – (20,00,000 + 2,000 + 1,50,000] / 5,00,000 = Rs 17.61 

Your investment in a mutual fund will get traded at the market’s closing price of Rs 17.61 per share for a particular day. 

A common misconception on NAV you must not believe

One of the common misbeliefs among many investors is that a mutual fund scheme with a lower NAV is cheaper. This specific misbelief is also used for promoting NFO (new fund offers) as their units get issued at FV (face value) of Rs 10. However, remember that a fund’s NAV can be high or low due to various reasons. As the fund’s NAV is based on the market price of its underlying assets, a well-managed fund’s NAV can grow better as compared to other mutual funds. Similarly, those funds that are considerably newer hold lower NAVs as compared to older funds as the former did not get much time to grow. Thus, you must not consider NAVs for comparing funds, instead you must factor in the fund’s previous performance and future prospects to select the fund of your requirement and preference.

Ending note

While NAV is a significant factor in a mutual fund investment, it doesn’t determine the mutual fund’s future performance. However, by assessing your fund’s NAV, you can examine if a mutual fund can adequately meet your investment goals and objectives as per your risk tolerance level.


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