Net Asset Value, or NAV, is the market value of a fund’s unit. It is computed by subtracting the liabilities from the total assets and dividing by the total number of units.
It is known that fund houses collect money from investors and invest in various securities such as stocks, bonds, etc. The total of the current value of all the securities, along with cash, is the total assets or the assets under management (AUM).
NAV= (Total assets – Liabilities) ÷ (Total Number of Units)
While investing in a mutual fund, an investor is required to put in the money that is equivalent to the NAV multiplied by the number of units he/she is willing to purchase. Alternatively, if an investor is willing to invest a fixed sum (say Rs 5000), the fund provides the units in fraction (For example, 2.678 units) depending on the NAV applicable.
How and when is NAV computed?
NAV of a fund is computed based on the closing price of the security. Typically, for all the open-ended funds, the NAVs are calculated daily. Funds may also calculate NAV on a weekly or fortnight basis, depending on the objective and prospectus.
Applicability of NAV
A person can invest in a mutual fund on any business day of the year, but one may or may not get the same day’s NAV. It could be yesterdays, todays, or tomorrow’s NAV. It depends on the time you submit your application and transfer the money to the fund house. This time is known as the cut off time in a mutual fund, and it differs for different types of funds.
Cut off timings for different types of funds
Given every fund has a different nature, the cut off schedule differs as per the category.
|Category of fund||Cut off time|
|Liquid funds||1.30 pm|
|Equity funds||3 pm|
|Debt funds||3 pm|
|Hybrid Funds (Debt oriented)||3 pm|
|Hybrid Funds (Equity oriented)||3 pm|
- Liquid funds: The cut off timing for the liquid fund is 1.30 pm. So if you submit the application for investing in a liquid fund and make the transfer of funds before 1.30 pm, the NAV that is applied to every unit is of the previous day. If you fail to transfer within the cut-off time, the NAV of the same day on which the amount is received is applicable to capture the number of units.
- Equity and Debt funds: The cut off time for both equity and debt funds is 3 pm. So, if you submit your application before 3 pm, you get the NAV of the same day, and if you submit the application after 3 pm, the NAV of the next day is applied. For these two types of funds, the transfer of funds is not a mandatory criterion. The exception to the rule mentioned above is that if the investment amount is more than Rs. 2 lakh, both the application and transfer should be completed before the cut off timing.
Does cut off timing matter to long-term investors?
Cut off timings are not crucial for investors who are looking to invest from a long-term horizon. This is because a few percentage point change in 1-day will not cause a significant impact if you are looking for a 10-year horizon.
Cut-off time is crucial for short-term investors who invest in a large sum. Even a percentage point change in such cases could lead to a significant reduction in expected profit.
Is NAV important while investing?
In India, by nature, people tend to think that a fund having a NAV of 100 is costlier than a fund that has a NAV of 30. This is not the case. While planning for investing in mutual funds, you should not pay too much attention to NAV. There are other factors such as performance (in absolute and relative sense), beta, performance consistency, and assets under management that should be given importance.
To conclude, NAV is the value of every unit of a mutual fund based on which an investor transact to buy or sell a fund. Also, investing decisions should not be based on NAV as the value of the unit doesn’t make a fund good or bad. To know more about how to select a fund or to invest in the Tarrakki recommended funds, feel free to download our app from iOS and Android.