NAV, and what it is not
Net asset value is the fund's assets minus its liabilities, divided by the units outstanding. It is not a share price, a fund with a ₹10 NAV is not cheaper than one at ₹500, and buying before a payout gains you nothing.
Chapter 2 · Beginner
Net asset value is the most quoted number in Indian mutual funds and the most misread. It is worth getting exactly right, because three expensive mistakes come from misunderstanding it.
The formula
SEBI:
NAV of a scheme is determined by dividing the net assets (Total Asset – Total Liabilities) of the scheme by the total number of outstanding units on any particular date.
SEBI's own worked example, which is worth following through:
- Total assets: ₹200 lakh
- Total liabilities: ₹10 lakh
- Net assets: ₹190 lakh
- Units outstanding: 10 lakh
- NAV: ₹19
That is the whole calculation. The assets are the market value of everything the scheme holds. The liabilities are what it owes, including accrued expenses. Divide by units and you have the value of one unit.
The same money in a ₹15 fund and a ₹600 fund
A fund that launched recently. Every fund starts near ₹10.
The same portfolio quality, launched twenty years earlier.
- The ₹15 fund buys
- 667 unitsworth ₹11,200
- The ₹600 fund buys
- 17 unitsworth ₹11,200
Identical, to the rupee. The unit counts differ by about 40 times, and the value does not differ at all — because units are amount ÷ NAV and value is units × NAV, so the NAV cancels out. Drag the two NAVs as far apart as you like; the two figures above will stay equal. A 12% return is 12% in both.
Why it changes every day
Because the market value of the holdings changes every day. SEBI requires NAV to be determined daily and disclosed daily, and sets the deadline for most schemes at 11 PM on the day of the transaction.
A few scheme types get longer, for a reason worth noticing: schemes with at least 80% in permissible overseas investments, and funds of funds, have until 10 AM the next day, because the markets whose prices they need have not closed yet when India's have. The timeline is a consequence of arithmetic, not of slower administration.
The mistake that costs the most
A fund with a NAV of ₹15 is not cheaper than one with a NAV of ₹600.
This is the most persistent misunderstanding in Indian mutual funds, and it comes from applying share intuition to a unit.
A share price reflects a claim on one company, and comparing two share prices without knowing the earnings behind them is meaningless but at least involves two different businesses. A NAV is the value of one unit of a portfolio, and the number of units is arbitrary. A fund that launched at ₹10 twenty years ago and has done well has a high NAV. A fund that launched at ₹10 last month has a NAV near ₹10. That difference is age, not value.
Put ₹10,000 into each. In the ₹15 fund you get 666.67 units; in the ₹600 fund you get 16.67 units. If both portfolios rise 12% over a year, both NAVs rise 12%, and both holdings are worth ₹11,200. The unit count differed by forty times and made no difference at all.
There is no "cheap" NAV, and a new fund offer at ₹10 is not a discount. It is a fund with no track record, priced at the number every fund starts at.
The second mistake: buying before a payout
A fund's IDCW option — what used to be called the dividend option — pays money out of the scheme. When it does, the NAV falls by the amount paid.
This is the same arithmetic as the ex-dividend date in chapter 3 of the equity subject. The money came out of the portfolio, so the portfolio is worth less. You have converted part of your holding into cash and been taxed on it.
SEBI renamed the option on 1 April 2021 to Income Distribution cum Capital Withdrawal, and said why: to avoid the confusion that the dividend option was a guaranteed bonus. The new name is ugly and accurate. "Capital withdrawal" is in it because that is partly what it is.
The third mistake: reading NAV as performance without reading what it excludes
SEBI is precise about what the published NAV already accounts for:
NAV declaration made by AMC/Mutual Fund on every business day is net of expenses, and consequently scheme performance disclosures made by Mutual Fund, which are based on NAV values of the scheme are also net of expenses but does not consider impact of load and taxes, if any.
So the expense ratio is already inside every NAV and every published return. You never see a bill; the cost has been taken before the number was printed. Chapter 3 is about how much that is.
What NAV does not account for is exit load and tax. A fund's published 12% is not what reached you if you redeemed inside the load period, and never what reached you after tax.
What NAV is good for
Two things, both real.
It is the price at which you transact — the basis on which units are bought and redeemed, which is what chapter 4 is about.
And the change in NAV between two dates, for the same plan of the same scheme, is the return over that period, net of expenses. Comparing a fund's NAV today with its NAV a year ago is legitimate. Comparing one fund's NAV with another's is not.
The point
NAV is net assets divided by units outstanding, declared daily. Its level is an accident of when the fund launched, so a low NAV is not cheap and a new fund at ₹10 is not a discount. It is already net of expenses, and not of exit load or tax.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Find two equity funds with very different NAVs — say ₹15 and ₹600. Put ₹10,000 into each on paper, assume both return 12% over a year, and work out what each is worth. Then say what the NAV level told you.
Work in units. The number of units differs by a factor of forty; the value of the holding does not differ at all.