What is Net Asset Value and how Mutual Funds earn returns

What is Net Asset Value and how Mutual Funds earn returns

What is Net Asset Value and how Mutual Funds earn returns

At some point in time or the other, mutual fund investor’s come across a financial term called “NAV”. Even after ignoring it, it still appears especially when doing a mutual fund transaction (either purchase or redemption). There are several misunderstandings about what it means and how it affects the choice of a fund.

What is Net Asset Value (NAV?)

The value of the Mutual funds is determined by the performance of the financial instruments in which it has invested. It is measured through the Net Asset Value (NAV) per unit. Just as equity shares have share prices, mutual funds have NAV. A fund’s NAV is arrived at by “Subtracting the liabilities and expenses from the Market Value of the securities held in the portfolio and dividing the result by the total number of units outstanding.”

   Net Asset Value (NAV) = Market value of all the Assets/securities – (Liabilities + Expenses)                                                                          Number of Outstanding Units

“NAV” of a mutual fund can also be known as the “Book Value” of a unit the same as equity shares have their book value.

Is NAV important while selecting a Mutual Funds?

The answer to the above question is a big NO. NAV of a mutual fund scheme should not be the criteria, based on which investment decision is taken. Some investors make a mistake of comparing NAV of mutual fund schemes with the price of an equity share which results in the idea that a low NAV fund is cheap. NAV never shows whether a scheme is priced low or high, it just a criterion to measure the performance of the scheme. Going through the following example will help in better understanding


There are three mutual funds schemes: MFS-X, MFS-Y, and MFS-Z. For comparison and understanding the importance of NAV, we have assumed that apart from NAV all other factors affecting all the schemes are constant.






Amount Invested





NAV of the Scheme





No. of units allotted

C= (A/B)




Annual Growth of Funds





NAV - After 1 year





Value of Investment after 1 Year






In the above table, all three schemes have the same value of the investment after one year even when all three schemes had different NAV and units allotted. This is due to the reason that NAV shows the current value or the performance of the underlying asset. It is not the mutual fund but the stock, bonds, or any other financial instrument that has performed on which the NAV is dependent. NAV is not a suitable indicator of the performance of the fund. There are several other factors on which the performance of the fund is dependent like Investment allocation, time horizon, etc.


Income from Mutual Fund

An investor commonly earns a return from a mutual fund in the following ways:

  1. Dividends/ Interest: Dividends are earned on stocks and interest on bonds and other fixed-income securities held in the portfolio by the Mutual Fund. Generally, a fund gives its investors an option to receive the dividends or to reinvest the earnings and get more units. All most all the income earned by the fund is either distributed by the fund or reinvested depending upon the choice of the investor.
  2. Capital Gains: If the market value of the financial instruments in the portfolio has increased, it means the fund has capital gains. Investors can withdraw these gains by redeeming the units to get a higher price for their investment after fulling certain conditions as required.