What is NAV in Mutual Fund? How is NAV Calculated?

Investors might sometimes mistake NAV for the price of a MF. This is not true. It is easy to mistake a NAV of Rs. 25 to be worth more in price than a NAV of Rs. 10. This confusion often stems from the fact that they think that the NAV of a MF works the same way as the price of an equity share. Consider for example, Fund A which has NAV of Rs. 25 and Fund B that has NAV of Rs. 10. If the portfolio of both these funds have the same constituent securities or shares, then the differing NAV is irrelevant for the purposes of arriving at the cost of the fund.

NAV is calculated by summing up the market value of all securities and subtracting the amount of debts of the MF and dividing that number by the number of units outstanding. What the NAV tells us is the value of one unit of the mutual fund.
Net Asset Value = (Market value of all securities held by the fund minus Debt) divided by Total Number of units outstanding

1. Daily NAV Calculation: Mutual Funds calculate and publish NAV on all business day (except for Liquid Fund wherein NAV is published for calendar days). So when you see the NAV at the beginning of the day, it is actually the previous day's NAV. At the end of the market day, the MF company calculates the NAVs as per the formula provided above. It should be noted that new investments and fresh withdrawals can impact the number of units and consequently the NAV.
2. General NAV Calculation: Suppose a MF has a NAV of Rs.100; if you decide to invest in the MF, that is how much you will be paying for one unit of that fund. Let's say you buy 100 units; you will have to pay Rs.1,000 (Rs.100 x 100 units).

The NAV standalone is not an indicator of a fund's performance. A higher value of a MF NAV is not a parameter for selecting it. What the NAV does tell us is how the underlying assets have performed in a particular MF and how the fund performs on a day-to-day basis. You should pick a fund based on its historical performance, the quality of fund management, the constituents of the fund and most importantly, the role that the fund has to play in your own financial goals.
Understanding how NAV works is important if you are considering investment in MFs. When you are familiar with the dynamics behind NAV, you will be able to gauge the movements of your MF investments on a daily basis and become a more seasoned investor.