What is Net Asset Value (NAV) in SIP? Types, Formula and calculation

Investing in Mutual Funds through a Systematic Investment Plan (SIP) has become increasingly popular among investors looking to build wealth over the long-term. However, the process associated with Mutual Fund investing can be challenging for beginners. One such term that often arises in discussions about SIPs is NAV. Understanding what NAV represents is crucial for making informed investment decisions. So, let us look at what NAV is and how it relates to SIP in this blog.

What is NAV?

NAV represents the per-unit value of a Mutual Fund. It signifies the price at which investors can buy or sell a unit of a Mutual Fund. NAV is calculated by taking the total value of all the assets in the fund, subtracting the liabilities and dividing this net value by the number of units outstanding. NAV serves as a crucial benchmark for assessing the fund's performance and is used by investors to track their investments.

Thus, NAV is not a uniform metric applicable across all types of Mutual Funds. Its frequency and calculation method vary depending on the fund's structure. For open-end Mutual Funds, NAV is computed daily, providing investors with the end-of-day market values of the fund's assets. In contrast, closed-end funds have periodic NAV calculations, which may occur weekly or monthly due to their distinct fund structure.

The significance of NAV in SIP

NAV is crucial in determining the cost and performance of investments made through SIPs. Here's why knowing the meaning of NAV in SIP is essential:

• Unit allocation: When investors contribute fixed amounts regularly to SIPs, the number of units allocated depends on the prevailing NAV at the time of investment. A lower NAV means investors receive more units for their investment while a higher NAV results in fewer units.
• Cost averaging: SIP investors benefit from rupee-cost averaging. It means the fixed SIP amount buys more units when NAV is low and fewer units when it's high. Over time, this averages out the cost of investment, reducing the impact of market volatility.
• Long-term perspective: NAV fluctuations are common in SIPs but what matters most is the overall trend over time. Consistent growth in NAV over several years indicates a potentially stable and rewarding investment, reinforcing the importance of maintaining a long-term perspective.
• Strategic timing: Understanding NAV trends can help investors strategically time their SIP investments. Investing during periods when the NAV is low can lead to accumulating more units, potentially resulting in higher returns as the market recovers.

What is the formula for NAV?

Here is the formula to calculate NAV for mutual funds:

NAV = (Total Assets – Total Liabilities) / Number of Outstanding Units

Types of NAV

There are two types of NAV calculations.

• The daily NAV is updated after markets close at 3:30 PM, based on the latest market value of the securities in the fund's portfolio.

• The general NAV reflects the total market value of all holdings and cash equivalents, adjusted for liabilities like management fees, operational costs, and pending expenses. This value is divided by the number of units held by investors. 

How is NAV calculated?

Calculating NAV might appear complex initially but it's straightforward once broken down. The NAV formula is NAV = (Total Assets - Total Liabilities) / Total number of outstanding units.

In simpler terms, it's the difference between a fund's total assets (which include investments like securities, cash and receivables) and its total liabilities (like management fees and operational expenses) divided by the total number of units issued by the fund.

This calculation gives investors a clear picture of the value of each unit or share in the fund, helping them assess its performance and make informed decisions on their investments.

NAV in Mutual Funds is subject to various factors. Understanding them is crucial for investors seeking to get through the complex workings of Mutual Fund investments.

What is the Net Value of Assets for Mutual Funds?

NAV stands for Net Asset Value, and it represents the per-unit price of the mutual fund, which is calculated at the end of each trading day. NAV indicates the total value of all the fund's assets, such as stocks, bonds, cash, dividends, and interest, minus its liabilities, such as expenses, fees, and outstanding payments. With NAV, investors can easily understand the daily value of one unit of the fund. 

Factors influencing NAV in Mutual Funds

Here, we will look at the key elements that contribute to NAV fluctuations:

1. Market dynamics

NAV is a dynamic metric influenced by the constant ebb and flow of market conditions. When markets are bullish, reflecting a period of overall rising prices, the securities held within the Mutual Fund tend to increase in value. Consequently, this leads to a rise in the fund’s NAV as a whole.

2. Fund flows

The flow of funds in and out of a Mutual Fund has a direct impact on its NAV. When investors pour money into a fund through purchases or reinvested dividends, the fund's assets increase causing its NAV to rise. Conversely, when investors redeem their shares or receive dividend payouts, the fund's assets decrease leading to a decline in NAV.

3. Dividend distributions

Dividend distributions represent a significant aspect of Mutual Fund investing with implications for NAV. When a Mutual Fund pays out dividends to its shareholders, the NAV per share decreases by the amount of the distribution. This adjustment reflects the transfer of value from the fund to its investors and does not signify a loss in the overall fund value.

4. Management Expenses

Management expenses play a pivotal role in shaping the NAV of a Mutual Fund. These expenses which include management fees, administrative costs and operational expenses are deducted from the fund's assets. As a result, they exert a downward pressure on the NAV over time. Funds with higher management expenses experience slower NAV growth compared to those with lower expenses.

5. Asset Allocation and Investment Strategy

The NAV of a Mutual Fund is influenced by its asset allocation and investment strategy. Funds with different asset allocations, such as equity, fixed income or a combination of both, may exhibit varying NAV levels and growth rates. Similarly, the fund manager's investment strategy, whether active or passive management also affects NAV performance.

6. Comparative Analysis

When comparing NAVs across different funds, investors should consider various factors beyond numerical values. Each fund's investment objectives, asset classes, risk profiles and historical performance must be carefully assessed. 

Role of NAV in the performance of a Fund

The full form of NAV is Net Asset Value. It represents the per-unit price of a mutual fund and is calculated based on the total value of assets minus liabilities. While it shows the daily value of a fund, NAV alone does not determine a fund’s performance.

There is a very common myth around NAV that a lower value for NAV means a cheaper fund, but that’s not true. A fund’s returns depend on how its underlying investments perform over time, not on its NAV. Two funds with different NAVs can offer similar returns. Therefore, investors should also focus more on past performance, fund consistency, expense ratio, and risk profile. 

What are the investment choices at ICICI Bank?

At ICICI Bank, investors have access to a diverse range of investment choices tailored to meet their unique needs:

• Lumpsum Investment: This option is ideal for those seeking to make significant investments at once, providing a convenient avenue to utilise capital.
• Systematic Investment Plan (SIP): SIP is suitable for investors looking to build wealth systematically. It allows them to invest fixed amounts at regular intervals, ensuring disciplined wealth accumulation over time
• Freedom SIP: Combining the benefits of SIP with a Systematic Withdrawal Plan (SWP), Freedom SIP offers investors the flexibility to invest and withdraw funds systematically, aligning their investments with their cash flow requirements

Conclusion

Understanding the concept of NAV in SIP is important for investors beginning their Mutual Fund investment journeys, particularly through Systematic Investment Plans (SIPs). NAV is a vital benchmark for assessing a fund's performance and plays a pivotal role in SIP investing.

With a diverse range of investment choices available, ICICI Bank offers investors tailored solutions to get through the complexities of the investment sector. Investors can start the process towards wealth accumulation with confidence and clarity, guided by the understanding of NAV and its implications on Mutual Fund investing.

FAQs

What happens when NAV increases?

In case the NAV or the Net Asset Value increases, it means that the value of your mutual fund investment has grown. The fund’s assets have performed well, which gives you more value per unit you hold in the fund.

Is Net Asset Value the same as equity?

No, NAV is not the same as equity. NAV shows the per-unit value of a mutual fund, while equity refers to shares of a company. NAV helps track mutual fund performance; equity tracks company ownership.

Why is NAV important?

NAV is important because it shows how much one unit of a mutual fund is worth. It helps investors know the current value of their investment and decide when to buy or sell units.

Which one is better: A higher or lower NAV?

A lower or higher NAV doesn’t mean better returns. What matters is how the fund performs over time. A fund with lower NAV can give the same returns as one with higher NAV, depending on growth.

What do you mean by NAV?

NAV stands for Net Asset Value. It represents the per-unit price of a mutual fund. It is calculated by subtracting the fund’s total liabilities from its total assets and dividing the result by the total number of outstanding units.

Formula:
NAV = (Total Assets – Total Liabilities) / Number of Units