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What is the net asset value of a unit of a mutual fund scheme

LiveMint logoLiveMint 17-04-2017 Lisa Pallavi Barbora

The net asset value ( NAV) of a mutual fund scheme is the price per unit of the scheme. If you think of a mutual fund as a one large-sized fruit cut up into many small pieces to represent each investor who holds exactly one unit, then the NAV is the monetary value of that unit. An apple worth Rs40 cut up into 10 equal parts would result in a value of Rs4 per unit.

Similarly, a mutual fund scheme with a specified value divided among all the issued units results in the NAV. The NAV number is not important. This is so because the scheme collects money from investors, invests it in different securities and creates a portfolio with a monetary value; from this the expenses are deducted to arrive at the NAV.

The initial Rs10 NAV is set as a starting point for investors as the funds collected by the scheme are yet to be invested. As the amount starts to get invested, the value of the initial pool changes, depending on whether there are net gains or losses. This value, divided amongst all units and adjusted for expenses, is the new NAV. It isn’t always that the initial NAV is at Rs10; for certain money market funds like liquid funds, the starting NAV can be Rs1,000 too. The absolute value of the initial NAV is not relevant as it is only after the money gets invested that the true market value of the unit is represented.

Comparing the actual NAV of one scheme with another serves little purpose. Lets say, a scheme XYZ Fund has an NAV of Rs25 and a similar scheme ABC Fund has NAV of Rs50. We cannot infer that the latter is more expensive than the former. NAV is derived from the collective value of securities, which is then distributed across units.

Hence, we can only compare NAVs of schemes where the initial collective pool amount, the start date and the number of investors is exactly the same. For all other cases, what holds relevance is the trend in NAV or the daily change. The daily change in market value of a scheme can be compared with another. You can also compare change over longer periods of 3, 5 or more years. Just make sure to compare NAVs of schemes whose construct is similar.

The initial NAV is referred to most during a new fund offer but it is incorrect to invest in new fund offers thinking that you are getting in cheap. The value of a new fund depends on where it is investing and whether on an aggregate basis those securities have gained or lost value. NAV is neither cheap nor expensive, it simply tells us the current value.

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