What is NAV or net asset value?

The net asset value or NAV of a mutual fund is the price you pay for a unit of a scheme.

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The net asset value or NAV of a mutual fund is the price you pay for a unit of a scheme. For example, if the NAV of a scheme is Rs 15, you will have to pay Rs 15 to buy a unit of the scheme. Similarly, if you sell a unit of the scheme, you will get Rs 15 for it or a little less than 15 if there is an exit load on sale. Usually, an exit load is applicable on sales made within a specified period after investment, and exit load is usually charged as a percentage of the net asset value.

Now, how is NAV calculated? The NAV of the scheme is the total value of its investments minus liabilities. That means, you can calculate the NAV of the scheme by finding out the total value of its assets (investments, cash, etc) and deducting the total value of its liabilities, fees, etc from it. You have to divide this value by the number of units of the scheme since NAV is expressed as value of scheme per unit.

The NAV of the scheme goes up when the investments made by the scheme do well. That means, when the prices of investments go up, the NAV of a scheme also goes up. And the opposite is also true.


Now, should you base your investment decisions on the NAV of a mutual fund scheme. For example, many mutual fund investors used to believe that they should buy mutual funds during an NFO because the units are available at Rs 10. Similarly, some people still believe that they should always buy schemes with lower NAV because there is scope for NAV to go up further.

These are wrong approaches. Possibly because these investors are actually comparing mutual fund units with stocks listed on the stock exchanges. However, you should not compare stocks with mutual funds, as they are two different instruments. A stock price is the value of a share of a company. Mostly, the price also reflects the expectations of the market from the company in the coming days or years. However, the NAV of the scheme reflects the value of its assets minus liabilities.

That means, the NAV could be higher if the investments made by the scheme have done well. For example, a seasoned scheme that has been around for many years would have a higher NAV because it has made investments that have done well over a period. However, a new scheme would have an NAV of Rs 10 because it is only collecting money from investors. Its NAV would go up only when the scheme starts investing and the value of those investments appreciates.
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