Understand Net Asset Value (NAV) in Mutual Fund

Although Net Asset Value (NAV) is a general term but it is commonly used in relation to unit trust or mutual fund. If you invest in stock, then you probably know the stock price for each single unit stock.

So, NAV is something similar to stock price but it is usually meant for unit trust or mutual funds or exchanged-traded funds(ETF). NAV per unit is the price or value of each single unit of the funds. Let’s look at the formula:

NAV per unit = (Total Asset of the Fund – Total Liability of the Fund) / Total Number of Units

Note: When people say NAV, it usually refers to NAV price per unit of the fund although the "per unit" is not explicitly mentioned.

For example, if the total net asset of the Fund A is $100 million and the number of unit issued to the public is 150 million units, the NAV would be ($100M/150M) = $0.67 which is 67 cents of each unit of Fund A.Well if you’re not finance people, this is probably too technical for you. Let's make it the simpler definition of NAV. NAV is the unit price of a mutual fund! Is this simple enough?

What does NAV mean for you?

It basically really means NOTHING to you. Okay, okay, perhaps something. It tells you the value of the unit price of a mutual fund. Just like stock, it tells you whether a fund is too expensive or is still cheap? Wait a minute! Can you really tell? No, you don’t because it is all about comparison. You need to compare at least 2 funds to tell whether the NAV is expensive or cheap. 

FUND	N.A.V ($)
A	0.67
B	0.90

If Fund A is cheaper than Fund B, what does this mean? It means you can buy more units from Fund A with the same amount of money. E.g. with $1K, you can buy ($1K/$0.67) = 1492.54 units from Fund A and ($1K/$0.90) = 1111.11 units from Fund B. 

But does this mean you have more units and you will earn more? No, it does NOT tell you the performance of the funds because the value of your investment is always the same which is $1K. So eventually, it basically means NOTHING to you too. Unless Fund A and Fund B started out the same day with the same price, then you can only tell that the Fund B performance is better than Fund A or else you can’t conclude anything out of it.

Discussion

In my opinion, the NAV of unit trust or mutual funds doesn’t really mean anything. It just tells you the current price of the unit trust but it doesn’t tell you the performance of the fund. You shouldn't buy a fund because of it's NAV is cheap. When choosing a unit trust or mutual fund, one should look at the fund’s financial objective, how good is the company management and does the fund has shown any good track record and etc.

On the other hand, don’t forget the investment is all about emotion too. Let’s look at the Fund A vs Fund B above. What do you think majority of people will buy? Fund A or Fund B? Fund A is cheaper right? So the chances for Fund A to go up is higher than the chances for Fund B to go up? So when everyone buy Fund A, the price of the Fund A will go up eventually?

So now back to you, will you buy fund because of the cheap NAV?