What is NAV?
A new MF investor would like to know about the NAV in a mutual fund. NAV (Net Asset Value) means the unit price of one mutual fund scheme. MFs are purchased and sold on NAV. Unlike prices of shares that change constantly during hours of trading, NAV gets calculated on the daily basis, and this is computed at the day’s end considering closing prices of all the securities owned by the respective mutual fund schemes after incorporating appropriate adjustments. NAV of the MF scheme varies on a day-to-day basis. Expenses related to the MF scheme including fund management, administration, distribution etc. are charged on a proportionate basis against the scheme’s assets and are adjusted in NAV of the scheme.
Calculation of NAV
NAV of an investment company means the company’s total assets minus its total liabilities. If the investment company has securities and other assets totaling INR100 million and liabilities worth INR10 million, NAV of the investment company will come out to be INR90 million.
Because investment company’s assets and liabilities fluctuate on a daily basis, NAV should change daily. NAV can be INR80 million one day, INR95 million the next, and INR70 million the day after.
Mutual funds and Unit Investment Trusts (or UITs) have a requirement to ascertain NAV at least once every business day. They calculate NAV after major U.S. exchanges are closed.
Formula to calculate a NAV is:
Net Asset Value = [Total Asset Value— Expense Ratio] / Number of Outstanding units
Share price of MFs and traditional UITs is on the basis of their NAV. This means that the price which investors pay to buy MF and most UIT shares is approximate per share NAV. Price which the investors get on redemptions means an approximate per share NAV, minus any fees which the fund deducts (such as exit loads).
Mutual fund’s NAV is calculated by a fund accounting firm which is hired by MF or MF house itself. According to the SEBI guidelines, all MFs are required to publicly display NAV and they can update it on AMC & AMFI websites.
When should NAV be calculated?
Mutual fund’s NAV is not calculated when the stock market is open because underlying security’s price fluctuates on a constant basis. Once the market gets closed and the trading hours are over, NAV can be calculated. This is because NAV is calculated by using the closing prices of the fund’s securities for that particular day.
NAV basically means the fund’s market value. When calculated as a per-share value, it exhibits fund’s per unit market value. Per-share value means a price at which investors can buy or redeem fund’s units. When securities’ value in the fund goes up, NAV follows. Conversely, when the value of the securities in the fund declines, its NAV goes down. To be precise,
- When the value of securities in the fund rises, NAV of the fund increases.
- When the value of securities in the fund falls, NAV sees a decline.