Do you know how NAV of a mutual fund is calculated?

The performance of a mutual fund scheme is reflected by its net asset value (NAV). The term NAV is quite common, particularly among investors who invest in mutual funds and pay too much attention to their past returns. These investors frequently overlook one critical question: how well will the fund perform in the future?

Also, to understand your returns, one needs to clearly understand the NAV of the scheme. It is an important parameter that indicates to  the unitholder their equity position.

If you’ve ever invested in a mutual fund, you’re already familiar with the concept. Mutual funds pool money from investors and invest it in stocks and securities. The market value of securities fluctuates daily; the NAV of a scheme likewise fluctuates daily.

It is the market value of a scheme’s securities. When presented on a per-share basis, it shows the fund’s market value on a per-unit basis. Investors purchase and sell fund units on a per-share basis. As the fund’s securities value improves, the NAV increases as well, and vice versa.

Sample this: If a mutual fund has a NAV of Rs 600, how much will one have to pay for one unit? If one invests Rs 6,000 in a mutual fund with a NAV of Rs 600, then they will provide 10 units of that fund. That said, the price variations are subject to modification as per the market. This is why a mutual fund portfolio begins with a daily value.

How is NAV determined? 

The NAV of a fund is computed after deducting all liabilities such as outstanding payments, money owed to the lenders, and expenses of managing the fund from the fund’s total assets.

In general, the Net Assets Value (NAV) of a fund can be determined as: NAV = (Total Assets – Total Liabilities) / Total Number of Outstanding Units.

As per a recent Sebi circular issued in September 2020 and December 2020, the applicable NAV effective from 1 February 2021, in respect of the purchase of mutual fund units, the allotment of mutual fund units would be at NAV applicable on the day of realisation of funds, i.e., the day when the fund house receives money.

What differentiates NAV from market share price is that NAV is determined by the AMC at the end of the trading day. In contrast, the share price is influenced by the demand and supply as well as views of the analysts on the future performance of the company.