NAV, explained on its own

Every mutual fund scheme has a NAV — a net asset value — and it is the number people fixate on and most often misread. The single most common mistake a first-time investor makes is to treat a low NAV as cheap and a high one as expensive. It is worth taking apart slowly, because getting it right removes a whole category of bad decisions.

What the NAV is

The NAV is the value of everything the scheme holds, minus what it owes, divided by the number of units in issue — the fund’s net worth split across its units.

If a scheme’s holdings are worth ₹500 crore after deducting what it owes, and there are 50 crore units in issue, the NAV is ₹10 a unit. When you invest, the number of units you receive is your money divided by that day’s NAV; the NAV itself is set by the fund, not by you.

A slice size, not a price tag

Here is the idea that does the work. The NAV is the size of one slice of the fund, not a price that tells you whether the fund is dear or cheap. Two schemes can hold very similar things and have completely different NAVs, purely because of how each divided itself into units at the outset.

Put ₹30,000 into a scheme with a ₹10 NAV and you get 3,000 units. Put the same ₹30,000 into one with a ₹100 NAV and you get 300 units. You own ₹30,000 of each either way. If the holdings of both rise by a tenth, each is worth ₹33,000; if both fall by a tenth, each is worth ₹27,000. The unit count differs; what happens to your money does not. The NAV decided your slice size and nothing else.

Struck once a day, after the market closes

Unlike a share price that ticks all day, a fund’s NAV is calculated once each business day, after the markets close and the day’s holdings can be valued. That is the price your transaction uses — and which day’s NAV you get depends on when your money reaches the fund relative to a daily cut-off. The point for now is that you cannot watch a fund’s NAV tick and try to buy an intraday dip; there is one number a day.

Why a new fund at ₹10 is not a bargain

New schemes are often launched at a NAV of ₹10, and that low, round number can look like a ground-floor opportunity next to an established scheme quoting ₹300. It is not. The ₹10 simply reflects that the new scheme has only just divided itself into units. It tells you nothing about what the scheme will do next.

An established scheme at ₹300 is not “expensive” and has no less room to rise — its holdings can grow by the same percentage as anyone else’s. A new scheme at ₹10 is not “cheap” and has no more room to rise. The starting number is an accident of arithmetic, not a discount, and choosing a scheme because its NAV is low is choosing on the one fact that carries no information.

What actually moves it

The NAV moves because the market value of what the scheme holds moves. If the shares and bonds in the portfolio are worth more today than yesterday, the NAV rises; if they are worth less, it falls. It also drops on the day a scheme pays out income under the IDCW option, because that money has left the fund — a fall that is a payout, not a loss. The annual running cost, the expense ratio, is already deducted before the NAV is struck, so the figure you see is net of it.

What to look at instead

If the level of the NAV tells you nothing about whether a scheme suits you, what does? What the scheme holds and the range of outcomes that implies; whether that range fits your horizon; and the cost of running it. Those are the questions what a mutual fund is and how to read a scheme document are about. The NAV is how your slice is priced, not a verdict on the fund.

Where the NAV does earn its keep is in arithmetic: given an amount, a period and a return you choose to assume, you can see how a fixed monthly investment might add up. Our SIP calculator does exactly that — a formula with your numbers in it, not a forecast of any real scheme.