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Understanding NAV, AUM & Expense Ratio

Introduction

Three key financial metrics that every mutual fund investor must understand are NAV (Net Asset Value), AUM (Assets Under Management), and the Expense Ratio. These terms directly impact your returns and help assess fund performance and cost-effectiveness.

1. What is NAV (Net Asset Value)?

Definition: NAV represents the per-unit price of a mutual fund. It is the value at which you buy or sell one unit of the fund.

Formula: NAV = (Total Assets - Total Liabilities) / Number of Outstanding Units

Example: If a fund has ₹100 crore in assets and ₹2 crore in liabilities with 10 crore units: NAV = (100 - 2) / 10 = ₹9.80 per unit

Key Points:

  • NAV is calculated at the end of each trading day.
  • It is not like a stock price and should not be used to compare across funds.
  • A lower NAV doesn’t mean a cheaper fund.

Myth Buster: “Low NAV means it’s cheaper or better” — False. Performance depends on returns, not NAV level.

2. What is AUM (Assets Under Management)?

Definition: AUM is the total market value of all assets managed by the mutual fund scheme.

Example: If a fund has received ₹500 crore from investors and invested that into equities and bonds, the AUM is ₹500 crore.

Impact:

  • A larger AUM usually indicates trust, popularity, and fund stability.
  • For debt funds, too large an AUM can reduce flexibility.
  • In actively managed funds, very large AUMs may reduce agility.

Tracking AUM Growth: Growing AUM shows increasing investor confidence and capital inflow.

3. What is Expense Ratio?

Definition: The expense ratio is the annual fee charged by a mutual fund to manage your money, expressed as a percentage of AUM.

Formula: Expense Ratio = (Total Annual Expenses / AUM) x 100

Types of Expenses:

  • Fund Management Fees
  • Administrative Costs
  • Marketing & Distribution Fees
  • Custodial & Legal Fees

Example: If you invest ₹1,00,000 in a fund with a 1.5% expense ratio, ₹1,500 will be deducted annually.

Impact:

  • Lower expense ratios are better for long-term returns.
  • Passive funds like Index Funds usually have lower expense ratios (~0.1–0.5%).
  • Actively managed funds may charge 1–2.5%.

4. Direct vs Regular Plans & Expense Ratio

Direct Plan:

  • You invest directly with the AMC.
  • Lower expense ratio (no distributor commissions).
  • Higher returns over long term.

Regular Plan:

  • Invest through an advisor or distributor.
  • Higher expense ratio due to commissions.

Example: If Direct Plan returns 12% and Regular returns 10.5%, the 1.5% difference is due to expenses.

Conclusion: Prefer Direct Plans if you are comfortable investing on your own.

5. How These Metrics Affect Your Returns

NAV:

  • Used only for entry/exit valuation, not to measure performance.

AUM:

  • Indicates size and sometimes efficiency of fund operations.

Expense Ratio:

  • Directly reduces your returns. Over time, even a 0.5% difference matters significantly due to compounding.

Illustration: Two funds — one with 1% expense ratio and another with 2% — both earning 12% before expenses:

  • Fund A (1%) = 11% net return
  • Fund B (2%) = 10% net return
  • Over 10 years, the difference is substantial!

6. FAQs

Q1: Is higher AUM always better? A: Not always. In small-cap funds, large AUM can dilute returns. But in liquid funds or index funds, high AUM indicates stability.

Q2: What is a good expense ratio? A: Under 1% is excellent for equity funds. Under 0.5% is excellent for index funds.

Q3: Does NAV growth equal profit? A: NAV increase reflects capital appreciation, but taxes and expenses must be accounted for to determine actual returns.

Conclusion

Understanding NAV, AUM, and Expense Ratio helps you evaluate and compare mutual funds more intelligently. In the next lesson, we’ll explore how to select the best mutual fund for your financial goals using these metrics along with historical performance and risk profile.