How is net asset value (NAV) calculated for a mutual fund?

The Net Asset Value (NAV) furnishes information regarding the market value of each unit held by an investor. When you trade in a mutual fund scheme, you purchase or sell the units. The NAV determines your profit or loss. While it looks easy to look at the NAV and decide the future course of action, here, we plan to discuss NAV in detail. After reading this article, you will know the procedure of calculating the NAV and the purpose of using all the mentioned variables.

What is Net Asset Value (NAV)?

The market value of each unit, calculated after deducting all the expenses and liabilities is known as the Net Asset Value (NAV). According to the rules and regulations of the SEBI, the mutual fund houses should declare NAV of each scheme at the end of the business hours. Since mutual fund houses deal in stocks, the NAV is updated after the business hours of the stock exchange has ended. NAV is also known as Net Book Value or Book Value.

Importance of NAV

Since NAV depicts the market value of a unit, it assists in deciphering the performance of the mutual fund. For example, you purchased some units in a mutual fund at Rs 50 per unit. After 3 months, the NAV stood at Rs 55. This means there is an increase in the NAV by 10%. In this case, you have accrued profits on mutual fund investment. Thus, you can use the NAV concept in determining the fund performance.

Net Asset Value Calculation

The first step towards calculating NAV is determining the total amount of assets owned by the mutual fund. As mutual funds invest in stocks, debts, and money market instruments, these can be collectively termed as securities. In addition to securities, the mutual funds hold cash as well. Further, they earn dividends and interests on these securities and cash. If we consider all these, we can refer to them as the Assets.

Now, the mutual fund house owns liabilities as well. Along with the liabilities, the mutual fund house accrues expenses in the form of fund management, salaries, and so on. The liabilities and the expenses can be clubbed as Debts.

Now, calculating the NAV by using formula,

Net Asset Value (NAV) = (Assets – Debts) / Number of Outstanding Units

We have added all the investment and profits in the assets section and deducted all the liabilities and expenses. The net value has been divided by the total number of units. This resulted in the Net Asset Value (NAV).

Important Considerations

  • Investors can consider NAV while analyzing mutual funds. Check out the NAV for the past three to five years on a quarterly basis. A consistent performance will denote that the fund is reliable.
  • The NAV is calculated after deducting all the expenses. These include operating expenses, management fees, marketing fees, agent fees, audit fees, and so on. Thus, you don’t need to worry about any hidden calculations and deductions.
  • As mutual funds deal in stocks of companies, they invest money in the stock market. Thus, the final NAV of a unit can be determined after the closing of a stock exchange for the day. Every day, after the closing hours, the NAV is uploaded by the mutual fund house.
  • According to SEBI rules and regulations, a mutual fund house should publish the NAV every business day. As the investors have invested their hard earned money, they should be aware of the minutest changes in the value of units. You can check out the NAV on the official website of the mutual fund or on any other verified source.

Post Author: Jennifer Slegg