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NAV is one of the first numbers an investor sees while looking at a mutual fund. It is also one of the most misunderstood. A fund with a NAV of ₹20 is not necessarily cheaper than another fund with a NAV of ₹200, and a higher NAV does not automatically mean a scheme has performed better.
NAV tells you what each unit of a mutual fund scheme is worth based on the value of the scheme's net assets. The figure changes as the market value of the securities held by the scheme changes, along with other assets, liabilities, and expenses.
This article explains what NAV represents, how it is calculated, why lower NAVs are not cheaper, and the SEBI rules governing transaction cut-off times.
Key Takeaways
- NAV represents the per-unit value of a mutual fund scheme's net assets.
- A lower NAV does not make a fund cheaper, nor does a high NAV indicate poor performance.
- NAV fluctuates daily based on the market prices of underlying securities, portfolio income, and expenses.
- Transaction NAV depends on SEBI-mandated cut-off times and fund realization.
- ETF market prices can trade at a premium or discount compared to their actual NAV.
What is NAV?
Net Asset Value (NAV) is the value of one unit of a mutual fund scheme.
A mutual fund collects money from investors and uses it to buy securities such as shares, bonds, government securities, or money-market instruments, depending on the scheme's investment objective.
The value of these investments changes over time. If the overall value of the scheme's investments rises, its net assets can increase. If the value falls, the net assets can decline.
NAV translates that overall net asset value into a per-unit figure.
For example, if a mutual fund scheme has net assets worth ₹100 crore and 10 crore units outstanding, its NAV would be ₹10 per unit.
How is NAV Calculated?
The basic formula is:
NAV = (Total Assets − Total Liabilities) ÷ Total Number Of Units Outstanding
Suppose a mutual fund has:
- Total assets: ₹500 crore
- Liabilities: ₹20 crore
- Units outstanding: 48 crore
Its net assets would be:
₹500 crore − ₹20 crore = ₹480 crore
The NAV would then be:
₹480 crore ÷ 48 crore = ₹10
So, the NAV of the scheme would be ₹10 per unit.
The actual calculation involves valuing the scheme's investments and making other applicable adjustments under the mutual fund valuation framework.
A mutual fund incurs recurring operational expenses like management fees, registrar charges, and custodian fees, collectively known as the Total Expense Ratio (TER).
To ensure fairness, AMCs accrue these expenses daily on a proportionate basis rather than charging a lump sum. This daily expense is deducted from the fund's asset pool before the final NAV is declared. Consequently, published NAV figures are already net of all operating expenses.
Why Does NAV Change?
NAV is not fixed. For an equity mutual fund, the most obvious reason it changes is movement in the prices of the stocks the scheme holds.
Suppose a scheme holds shares of several companies, and most of those stocks rise during the day. The portfolio value can increase, which can push the NAV higher.
The opposite can happen when the underlying securities fall. NAV can also be affected by factors such as:
- Changes in portfolio value: When the market value of the securities held by the scheme changes, the portfolio value changes.
- Income earned by the scheme: Interest, dividends, and other income received by the scheme can form part of its assets, subject to the applicable accounting and valuation treatment.
- Expenses: Expenses charged to the scheme can affect its net assets.
- Changes in liabilities: Liabilities and other payable amounts are taken into account while arriving at the net assets.
Direct vs. Regular Plans: Why is Direct Plan NAV Always Higher?
Every mutual fund scheme offers 2 options: Direct Plans and Regular Plans. While both options invest in the exact same portfolio of stocks or bonds managed by the same fund manager, their NAVs are different.
A Direct Plan always has a higher NAV than a Regular Plan for the same scheme.
Here is why:
- Zero Distributor Commissions: In a Regular Plan, the AMC pays a recurring commission (trail commission) to intermediaries, brokers, or distributors who sell the fund. In a Direct Plan, you buy directly from the AMC, so no distributor commission is paid.
- Lower Total Expense Ratio (TER): Because there are no commission costs, the daily operating expenses (TER) charged to a Direct Plan are lower than those charged to a Regular Plan—typically by 0.50% to 1.50% per annum.
- Compounding Impact on NAV: Expenses are deducted from the scheme’s assets daily. Lower daily expense deductions mean more money remains in the fund to compound over time. As a result, the NAV of a Direct Plan grows faster and remains consistently higher than its Regular Plan counterpart.
Note that a higher NAV in a Direct Plan does not mean it is more expensive. It reflects the higher accumulated returns delivered to investors due to lower internal costs.
Is NAV the Same as the Price of a Mutual Fund?
For a mutual fund scheme, NAV is the value used for unit transactions, subject to applicable rules. This is different from how a listed share works.
A company's share trades on a stock exchange, and its market price changes with supply and demand.
An open-ended mutual fund does not generally trade between investors on a stock exchange in the same way. Investors transact with the fund at the applicable NAV, subject to the relevant rules.
This distinction matters most when looking at Exchange Traded Funds (ETFs).
An ETF is listed and traded on an exchange. Its market price can move during market hours and may be slightly above or below the NAV.
Is a Lower NAV Better?
No, and this is one of the most common misconceptions about mutual funds.
Consider two schemes:
|
Particulars |
Fund A |
Fund B |
|
NAV |
₹20 |
₹100 |
|
Investment |
₹10,000 |
₹10,000 |
|
Units received |
500 |
100 |
Fund A gives more units because its NAV is lower.
That does not make Fund A cheaper or better. If both funds invest in similar assets and generate the same percentage return, the investment value can grow at the same rate regardless of the starting NAV.
The number of units does not determine whether an investment is good.
Does a Higher NAV Mean Better Performance?
A fund that has been around longer may have a higher NAV because its underlying investments have appreciated over time.
For example, one scheme may have a NAV of ₹150, and another may have a NAV of ₹25. That alone tells very little about which scheme has performed better.
To compare funds, investors need to look at factors such as:
- Returns over relevant periods
- Risk
- Portfolio composition
- Investment objective
- Benchmark
- Expense ratio
- Consistency of performance
- Fund category
The NAV by itself is not a performance ranking.
What is the Difference Between NAV and a Mutual Fund's Return?
NAV tells you the value of one unit at a particular point in time. Return tells you how the investment has changed over a period.
Suppose an investor buys units at an NAV of ₹25, and the NAV later rises to ₹30.
Ignoring distributions, the increase is ₹5 per unit.
The percentage change is:
(₹30 − ₹25) ÷ ₹25 × 100 = 20%
So, the NAV is the starting point for calculating the change in value, while the return measures that change.
How Does NAV Affect SIP Investments?
In a Systematic Investment Plan (SIP), you invest a fixed amount at regular intervals.
The number of units purchased depends on the applicable NAV.
For example, an investor has a monthly SIP of ₹5,000.
If the applicable NAV is ₹25:
₹5,000 ÷ ₹25 = 200 units
If the NAV is ₹20 the following month:
₹5,000 ÷ ₹20 = 250 units
The same ₹5,000 therefore buys a different number of units at different NAVs.
Over several instalments, this results in purchases at different NAV levels.
This is one of the basic mechanics behind regular mutual fund investing.
Which NAV is Used When Buying a Mutual Fund?
The NAV applicable to a purchase is not simply the NAV displayed when an investor opens the mutual fund app or website.
The applicable NAV depends on factors such as:
- Type of mutual fund scheme
- Transaction amount
- Time at which the application and funds are received
- Applicable cut-off rules
- Availability of funds for utilisation
SEBI's mutual fund framework prescribes cut-off timings and NAV applicability for purchase and redemption transactions. Investors should check the current rules and scheme-specific provisions rather than assuming that the displayed NAV will always be the transaction NAV.
Which NAV is Used When Buying a Mutual Fund?
The NAV displayed on an app or website is not automatically the exact price you receive when purchasing mutual fund units. Under SEBI guidelines, transaction NAV is determined by official cut-off timings and fund realization rules. For Equity, Debt, and Hybrid schemes, the standard cut-off time is 3:00 PM on a business day, whereas Liquid and Overnight funds have an earlier cut-off time of 1:30 PM.
Crucially, placing an order before the cut-off time alone does not guarantee that day’s NAV. SEBI’s fund realization rule mandates that the applicable NAV depends on when your money actually reaches the AMC’s bank account. For instance, if you submit an equity fund order at 2:30 PM but bank processing delays cause the funds to reach the fund house at 3:15 PM, you will receive the next business day’s NAV instead. Additionally, third-party investment apps often enforce slightly earlier internal cut-offs to ensure bank settlements clear before the official regulatory deadlines.
Which NAV is Used When Redeeming Mutual Fund Units?
The same principle applies when redeeming units, and the investor does not necessarily receive the NAV visible at the exact moment the redemption request is placed. The applicable NAV is determined according to the transaction and cut-off rules in force.
The amount received is broadly linked to:
Units Redeemed × Applicable NAV
Any applicable exit load or other permitted adjustment can affect the final amount received.
What Should Investors Check Along With NAV?
Before investing in a mutual fund, NAV can be viewed alongside:
- Fund category
- Investment objective
- Portfolio composition
- Risk level
- Historical performance
- Benchmark performance
- Expense ratio
- Fund manager and investment approach
- Liquidity and exit load, where applicable
- Investment horizon
The relevance of each factor depends on the type of mutual fund being considered.
Conclusion
NAV is the per-unit value of a mutual fund scheme's net assets. It provides the basis for understanding the value of the units investors hold and plays an important role in purchases and redemptions. A ₹20 NAV is not automatically more attractive than a ₹200 NAV. What matters is what the fund owns, how it has performed, what risks it takes, and whether it fits the investor's objective. In simple terms, NAV tells you the value of one mutual fund unit. It does not, by itself, tell you whether the fund is good, cheap, or expensive.
