# What the hell is NAV & AUM in a Mutual Fund and how are they calculated?

By now, most of you must be aware of how Mutual Funds (MF) work. If you still have doubts, you can quickly first spend 5 minutes reading about it HERE, and then come back to this article.

Assuming that you know the basics of how a Mutual Fund works, let’s understand what AUM and NAV actually is, and how they are calculated.

For simplicity (and as you may have read in the earlier article), NAV (or Net Asset Value) is nothing but the price of one UNIT of the Mutual Fund. However, let’s see this in detail.

Now, as you know, a Mutual Fund takes money from multiple investors like you and me, and invests it in instruments (or products) like shares of other companies, bonds, gold etc. Now, if the NAV of your Mutual Fund is, say Rs. 20, this means that one unit of the Mutual Fund can be bought at Rs. 20.

Let’s take a very simple example. We’ll calculate the NAV for a hypothetical Mutual Fund -”ABC Equity Fund”. Assume that the Mutual Fund till date, has has 1,000 outstanding units. Now, for simplicity, let’s assume that ABC Equity Fund had bought shares of just 5 companies - HDFC Bank, Infosys, TCS, Reliance Industries and Tata Motors in different proportions, totally worth Rs. 12,000.

[Please note that we are assuming that ABC has invested only in 5 companies. In reality, this is spread across multiple companies and also other products like bonds, gold, cash etc.]

Coming back. This Rs. 12,000 is the total AUM (Asset Under Management) of the Mutual Fund. The AUM is nothing but the total value of all assets (shares and other instruments/products) that the Mutual Fund has invested in. Here, since the MF has only invested in the shares of 5 companies, the AUM is Rs. 12,000. From this, the fund deducts liabilities and expenses (for example, salaries of employees, rent, electricity etc) to calculate the NAV.

Now assume that ABC has expenses and liabilities of Rs. 2,000. After deducting these expenses and liabilities, the remaining value of NET ASSETS is Rs. 10,000. Now, since it has 1,000 units, it means that the NET ASSET VALUE (NAV) of ABC Equity Fund is Rs. (10,000/1,000) = Rs. 10. So when you had bought 20 units of ABC @ Rs. 10 per unit, ABC had actually bought x shares of HDFC Bank, TCS, Infosys, Reliance and Tata in the same proportion (but lower number) as earlier and issued 20 units of the Mutual Fund to you. This means that your investment indirectly depends on the share price of these 5 companies. If their share price increases, the AUM increases. Which means the NAV also increases.

Now let’s assume that the share price of all these 5 companies remains constant tomorrow, and no more units are issued. So the NAV will not change, because the AUM is the same as yesterday and the NAV is still Rs. 10. In this case, your investment is still Rs. 200.

But imagine if the share price of Tata Motors increases. This means that the AUM has increased, which also means that the NAV has increased. If, for example, the total value of the 5 companies’ shares which ABC owns increases from 10,000 to 15,000, and after deducting expenses, this is Rs. 12,000, then, assuming 1,000 units, the NET ASSET VALUE (or NAV) of ABC Equity Fund is now 12,000/1,000 = Rs. 12. This means your investment amount is now Rs. 12 x 20 = Rs. 240.

Same way, if the any share price drops, the NAV drops and therefore your investment value drops. So the NAV is a great indicator of your Mutual Fund performance.

Now that you know what AUM and NAV is, let’s clear out some points regarding both:

AUM shows how small or large the Mutual Fund is. If it has more money invested in different products, the AUM will obviously be higher. If it has lesser money invested, the AUM is lower. This needs to be a fine balance. The AUM should neither be too high nor should it be too low (more on that in later posts)

NAV is calculated everyday, and units are allotted to you based on the NAV of the same day or the next day, depending on the time. Again, this is a bit detailed, so we’ll cover that in some other post. For now, just understand that the NAV is calculated once a day and units are issued based on this NAV to the investor

Lastly and most importantly, while the NAV is the price you pay for one unit of a Mutual Fund, it should not be confused with stock prices. A lower NAV does not necessarily mean that the Mutual Fund is good or bad to buy. And a higher NAV does not necessarily mean it will give good returns. You can buy units of a MF which has a very low or very high NAV also, if it is performing well. This is NOT like the stock market where a penny stock trading at Rs. 5 is considered unstable.

Well, that’s about it! I hope this post clears the air about AUM and NAV, and the next time you try to analyze a Mutual Fund, you can make a more prudent decision.

Any questions, feel free to reach out to me by replying to this e-mail or drop in your comments!

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