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How Mutual Fund NAV Works & Why It Matters?

Post Date : April 16, 2025

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.

New mutual fund investors often ask about Net Asset Value (NAV). While NAV is similar to the price of a share, it’s not the same. Many investors mistakenly focus on NAV when selecting mutual funds. Let’s break it down clearly.

Understanding Mutual Fund NAV

NAV represents the price of one unit of a mutual fund.

• NAV stands for Net Asset Value.
• Mutual funds pool money from investors and invest in stocks, bonds, and other assets class. Since these assets fluctuate in value, so does the NAV.
• Mutual funds are divided into units, and NAV reflects the per-unit value of the fund’s total assets.

Should Investors Focus on NAV?

No, NAV is largely irrelevant when choosing a mutual fund.

Many investors assume that a lower NAV is better, but this is a misconception. Newer mutual funds have lower NAVs simply because they were launched more recently. Some investors even sell their old mutual fund units to invest in funds with a lower NAV, which is not a sound strategy.

For example, if one fund has a NAV of ₹10 and another has a NAV of ₹20, you should not base your decision on NAV alone. Instead, consider factors like past performance, AUM size, alpha, Turnover ratio and beta.

Why Investor should not only focus on NAV?

Let’s understand this with an example:
Example:

• Mutual Fund A (MF-A): NAV ₹20
• Mutual Fund B (MF-B): NAV ₹50
• Both funds invest 20% in the same company (XYZ).

If XYZ’s stock price increases by 10%, both funds will see a 2% rise in NAV.

• MF-A’s NAV: ₹20 → ₹20.4
• MF-B’s NAV: ₹50 → ₹51

At first glance, MF-B seems to have gained more. However, let’s consider investment returns:

• Investing ₹100 in MF-A: You buy 5 units (₹20 each). After the increase, your investment is worth ₹102 (5 × ₹20.4).
• Investing ₹100 in MF-B: You buy 2 units (₹50 each). After the increase, your investment is also worth ₹102 (2 × ₹51).

Both funds yielded the same return, proving that NAV does not impact investment performance. What truly matters are the fund’s overall performance and strategy.

Difference between NAV and AUM

• NAV (Net Asset Value): Price of each unit of a mutual fund.
• AUM (Assets under Management): Total value of all assets managed by the fund, including cash holdings.

Investors should ignore NAV but consider AUM, as a larger AUM may indicate stability and investor confidence.
When is NAV Considered for Mutual Fund Purchases?

• Before 2 PM: You get the same day’s NAV.
• After 2 PM: You get the next working day’s NAV.
• On holidays: The NAV of the next working day applies.

When is NAV Considered for Selling Mutual Fund Units?

• Before 2:30 PM: The same day’s NAV applies.
• After 2:30 PM: The next day’s NAV applies.
• On holidays: The NAV of the next working day applies.

When is NAV Updated?

NAV is updated at the end of every working day. SEBI mandates mutual funds to update NAV by 9 PM daily. The updates are not live due to the complexity of tracking multiple asset values.

Should I Invest in a High NAV Fund?

Yes, if the mutual fund has strong performance indicators.

NAV does not indicate whether a fund is overvalued or undervalued, unlike stock prices.
Since NAV depends on AUM, not demand, a higher NAV does not mean the fund is expensive.

How Do Sensex and Nifty Affect NAV?
It depends on the type of mutual fund.

• Sensex (BSE 30): A weighted index of 30 major companies on BSE.
• Nifty (NSE 50): A weighted index of 50 major companies across 13 sectors on NSE.

Large-cap funds that invest in these companies are directly impacted by Sensex/Nifty movements. Mid-cap and small-cap funds may also be affected indirectly.

Is NAV Similar to Stock Price?
No, because NAV is not affected by demand.

• Stock prices fluctuate based on demand and supply.
• NAV reflects the book value of a mutual fund's holdings.
• Stocks can be overvalued or undervalued; NAV cannot.

What is the NAV of an SIP?
The NAV of an SIP (Systematic Investment Plan) is the same as that of the mutual fund.
SIP and lump sum are two methods of investing in mutual funds, but the NAV remains unchanged for both.

Can a Mutual Fund’s NAV Drop like a Stock?
Yes, if the value of its underlying assets declines.
However, NAV fluctuations are normal. Investors should not panic and sell mutual funds solely based on a temporary drop in NAV.

FAQs
What is AUM in Mutual Funds?

AUM (Assets under Management) is the total market value of the securities managed by a mutual fund. It includes stocks, bonds, and other investments. A high AUM reflects investor confidence and fund stability.
How to Calculate AUM in a Mutual Fund?
1. Locate the "Investments" or "Securities Held" section in the balance sheet.
2. Add up the value of all assets, including stocks, bonds, and cash holdings.
3. If the fund has multiple share classes (e.g., Class A, B, C), calculate AUM separately for each.
4. Since AUM fluctuates daily, refer to the latest financial statements for accuracy.

How to Increase a Mutual Fund’s AUM?

• Strong marketing efforts and financial advisor partnerships.
• Offering unique investment strategies.
• Consistently outperforming benchmark indices.
• Diversifying the portfolio to attract different investors.
• Providing additional services like financial planning and tax advisory.

Does AUM Affect NAV?
Yes, indirectly. Since NAV = (Total Fund Assets – Liabilities) ÷ Units Outstanding, a higher AUM can increase NAV if asset values rise. However, increasing AUM alone does not guarantee NAV growth.
What is Included in AUM?
AUM includes all assets managed by a mutual fund, such as:

• Stocks
• Bonds
• Cash
• Real estate (if applicable)

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