When you start looking at mutual fund fact sheets or investment apps, you encounter terms like NAV, AUM, and Expense Ratio. These sound technical but are actually straightforward once explained properly. Let us go through each one.
NAV — Net Asset Value
NAV is the price of one unit of a mutual fund. It is calculated daily after market hours by dividing the total value of all assets in the fund by the number of units outstanding.
Formula: NAV = (Total Assets − Total Liabilities) ÷ Number of Units
Common confusion: Many beginners think a fund with NAV ₹15 is “cheaper” than one with NAV ₹500. This is wrong. A high NAV simply means the fund has been running longer or has performed well. NAV level has no bearing on future returns.
AUM — Assets Under Management
AUM is the total market value of all assets managed by a fund. If a fund has 1 crore units and each unit (NAV) is ₹100, the AUM is ₹100 crore.
Why it matters: Very large AUM (thousands of crores) can be a challenge for small-cap and mid-cap funds because it becomes difficult to buy or sell large quantities of smaller stocks without moving the market price. For large-cap and index funds, higher AUM generally means better liquidity and lower costs.
Expense Ratio
This is the annual fee charged by the fund house to manage your money, expressed as a percentage of AUM. It is deducted daily from the NAV — you never pay it separately, it is already factored into the returns you see.
Example: A fund with ₹1 lakh investment and 1.5% expense ratio costs you ₹1,500 per year in fees. A direct plan of the same fund may have 0.5% expense ratio — saving you ₹1,000 per year.
Benchmark: Index funds: 0.1%–0.3%. Active large-cap funds: 0.5%–1.5%. SEBI caps expense ratios, so they cannot exceed regulatory limits.
One More: Exit Load
Some funds charge an exit load (penalty) if you redeem units within a specified period — typically 1 year for equity funds (usually 1% if redeemed within 1 year). After that period, there is no exit load. Always check before redeeming early.
Understanding these terms helps you compare funds accurately and make smarter choices. For a jargon-free conversation about your investments, write to us or call Ritesh Kumar directly.