Article

What is Net Asset Value (NAV) in Mutual Funds
June 07 , 2012

Net Asset Value is the current price of one unit of a mutual fund. It is typically updated on a daily basis, as the shares or bonds held by the fund move up or down in value. The NAV in itself is useless information; rather, it is the change of NAV in a time period that you should look for.

Why then is so much noise made about NAV? Simply because the more financially savvy gang cut and dissect this information to get insights into the fund pedigree and performance. You may want to actually completely give this a miss.

Meaning of NAV

There is a simple relationship between NAV, number of units and value. Assume you are in the market buying apples. Each apple is priced Rs 10, and you decide to buy a dozen. Thus, you would spend Rs 120 in all. In mutual fund or insurance parlance, the price of an apple is the NAV. The number of apples is the number of units. The total value you pay is the purchase value (or sale value if you are selling funds).

Thus, we have

Purchase or sale value= NAV * No of units

Let's say the next day, apples have become costlier- they are Rs 12 a piece. You can sell your dozen apples now for Rs 144. What has changed is the price (the NAV), and not the number of apples you have (the number of units). Thus, typically, you have the NAV changing on a daily basis, while the number of units that you have remain a constant till you sell them.

NAV in dividend option of mutual funds

There is one exception however that our apple analogy fails to capture- that of dividends. A dividend payment is like cutting a slice from the apple and allowing you to eat it. Obviously the remaining apple is now worth less, so the NAV drops to the extent the apple is sliced. 

A dividend reinvestment is like cutting an apple into smaller parts and bundling them together. You have exactly the same quantity of apples (in terms of total value), but you now have several small pieces rather than a few big ones. This is exactly what dividend reinvestment does- when it breaks up each unit of a large NAV fund, into several units of a smaller NAV fund. It has no relevance to you in general (except for taxation, which we shall look at in an appropriate context).

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