Chapter 3 of 15
How NAV Works
Net Asset Value, unit allotment, and why lower NAV ≠ cheaper fund.
Anita, a first-time investor from Chennai, was confused when she saw two funds side by side: one with a NAV of ₹12 and another with a NAV of ₹98. She assumed the ₹12 fund was "cheaper" and would grow more. Her financial advisor smiled and explained that NAV is probably the most misunderstood number in all of mutual fund investing — and understanding it properly would save Anita from making a very costly mistake.
What Is NAV, Exactly?
The formula is straightforward:
NAV = (Total Market Value of Assets − Liabilities) ÷ Total Units Outstanding
Every weekday (excluding market holidays), each mutual fund's AMC calculates and publishes the latest NAV based on the closing prices of all securities held. This is why NAV only changes on business days — if you check on a Saturday, you're seeing Friday's NAV.
Let's say the Mirae Asset Large Cap Fund has the following on a given day:
- Total market value of all stock holdings: ₹100 crore
- Cash and receivables: ₹2 crore
- Total Assets: ₹102 crore
- Management fees payable, accrued expenses (Liabilities): ₹1 crore
- Net Assets (Assets − Liabilities): ₹101 crore = ₹1,01,00,00,000
- Total Units Outstanding: 1,01,00,000 units (1.01 crore units)
Now suppose the stock market rises and the total asset value increases by ₹5 crore to ₹106 crore:
New Net Assets = ₹106 − ₹1 = ₹105 crore
New NAV = ₹1,05,00,00,000 ÷ 1,01,00,000 ≈ ₹103.96 per unit That's a 3.96% increase in NAV, matching the 3.96% growth in the portfolio.
The Dangerous Myth: Low NAV = Cheap Fund
A fund with NAV ₹12 is NOT cheaper than a fund with NAV ₹500. NAV simply reflects the historical starting price and cumulative growth since inception. A fund started 20 years ago with NAV ₹10 might now be at ₹500 — that's actually sign of excellent compounding. If you invest ₹10,000 in both funds, you'll own different numbers of units, but the money invested and the return percentage are what matter — not the NAV level.
Investor A puts ₹10,000 in Fund X (NAV ₹10):
- Units allotted = ₹10,000 ÷ ₹10 = 1,000 units
- After 1 year, if fund grows 10%, NAV becomes ₹11
- Value = 1,000 × ₹11 = ₹11,000 — gain of ₹1,000
Investor B puts ₹10,000 in Fund Y (NAV ₹100):
- Units allotted = ₹10,000 ÷ ₹100 = 100 units
- After 1 year, if fund grows 10%, NAV becomes ₹110
- Value = 100 × ₹110 = ₹11,000 — gain of ₹1,000
Conclusion: Both investors made exactly ₹1,000 (10% return) regardless of the NAV level. The NAV level is completely irrelevant to returns. Only the percentage growth of the underlying portfolio matters.
| Scenario | Fund A (NAV ₹10) | Fund B (NAV ₹100) | Result |
|---|---|---|---|
| Investment | ₹10,000 | ₹10,000 | Same amount invested |
| Units received | 1,000 units | 100 units | Different unit count |
| NAV after 10% growth | ₹11 | ₹110 | Proportional rise |
| Portfolio value | ₹11,000 | ₹11,000 | Identical ₹1,000 profit |
| Return % | 10% | 10% | Same return |
NAV Cut-Off Times: Why Timing Matters
Your investment gets allotted the NAV of the day based on when your transaction instruction and funds reach the AMC. SEBI has defined cut-off times for this:
| Fund Type | Cut-off Time | NAV Applied | Settlement |
|---|---|---|---|
| Equity Funds | 3:00 PM | Same-day NAV if before cut-off | T+1 day (units reflected next business day) |
| Debt Funds (< ₹2 lakh) | 3:00 PM | Same-day NAV if before cut-off | T+1 day |
| Liquid / Overnight Funds | 1:30 PM | Previous day NAV before 1:30 PM; same-day NAV if after | T+1 day |
| Redemption (Equity) | 3:00 PM | Same-day NAV | T+2 days (money in bank in 2 working days) |
| Redemption (Liquid) | 3:00 PM | Same-day NAV | T+1 day (money in 1 working day) |
For most mutual funds (equity and debt), if your money and transaction reach the AMC before 3:00 PM on a business day, you get that day's NAV. If it arrives after 3 PM, you get next business day's NAV. This matters especially for large-value transactions during volatile markets.
How Dividends Affect NAV
When a mutual fund declares a dividend (now called "Income Distribution cum Capital Withdrawal" or IDCW), the NAV falls by exactly the dividend amount on the ex-dividend date. This is not a loss — the money is simply being taken out of the fund and paid to you. Investors who think dividends are "free money" on top of NAV growth are mistaken; the NAV drop reflects the payout.
For most long-term investors, the Growth option is far superior to the IDCW option. In the Growth option, all earnings stay invested and compound, while in IDCW, dividends are taxed as income in your hands.
NAV Is Only Published on Business Days
Since mutual funds primarily invest in stock and bond markets that are open on weekdays, NAV is only calculated and published on business days (Monday to Friday, excluding NSE/BSE holidays). An investment made on Saturday or Sunday will receive the NAV of the next business day (Monday).
For a complete list of market holidays, check the NSE website or your fund house's AMC portal. Platforms like Groww and Zerodha also show the applicable NAV date at the time of your transaction.
A mutual fund has total assets of ₹500 crore, liabilities of ₹5 crore, and 1 crore units outstanding. What is the NAV?
Key Takeaways
- NAV = (Total Assets − Liabilities) ÷ Total Units Outstanding. It is merely the per-unit market price of the fund on a given day.
- A low NAV does not mean a fund is cheap or will give better returns — what matters is the percentage growth of the underlying portfolio, not the absolute NAV number.
- NAV is published every business day (weekdays only) after market close; transactions submitted before 3 PM get same-day's NAV, while those after 3 PM get next business day's NAV.
- For long-term investors, always choose the Growth option over IDCW — earnings stay invested and compound, unlike IDCW where payouts reduce the NAV and are taxed as income.