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A Deep Understanding on Net Asset Value of Mutual Fund and its Calculation

A Deep Understanding on Net Asset Value of Mutual Fund and its Calculation

Last Updated : March 17, 2017, 12:52 p.m.

Mutual fund serves as a suitable option for investors looking to get high return on their investments. Mutual fund, a high-risk, high-return proposition, is invested in various equity and debt instruments. Equity mutual fund primarily invest in stocks. Mutual fund stocks are classified according to the portfolio holdings. While, debt mutual fund schemes disperse the money in fixed income instruments such as bonds, government securities, corporate debentures, money market instruments, etc. This was all about the basic details of mutual fund. Now, get down to the Net Asset Value (NAV) of the mutual fund.

NAV, which is the price at which the mutual fund units are purchased or sold, arrives after deducting the liabilities. The value of all units is calculated daily after subtracting all the expenses. Subsequently, the value gets divided by the total number of units to arrive at the NAV, which is also known as Net Book Value or Book Value.

NAV Calculation

The assets are generally divided into two categories-securities & cash. The securities include both stocks and bonds. Thus, the total asset value of the fund will consist of stocks, bonds and cash at market value. Total assets will be the sum of dividends and interest accrued as well as the liquid assets. The assets also include the liabilities such as money due to creditors as well as other outstanding expenses. Check below the formula of NAV.

NAV=Assets-Debts/Number of outstanding units

Assets=Market value of mutual fund investments+receivables+accrued income

Debts=Liabilities+Outstanding expenses

The market value of stocks and debentures is generally the closing price of the units on the stock exchange.

What does NAV reflect?

The NAV symbolises the liquidation value of your investments and helps find out the performance of the mutual fund by keeping a track of the same. With NAV, you can keep a close eye of the fluctuations of the market affecting the performance of the mutual fund that you would have opted for. NAV also helps investors to calculate their returns as well as manage monthly payments in advance. NAV not only helps you know your returns and risks, but also helps spot the mutual funds worth the investments you make.

Key points to remember

  • NAV of a mutual fund is calculated by the mutual fund or various accounting firms engaged for the task
  • NAV is generally declared after the closing hours of the exchange as mutual funds are dependent upon the movement in stock markets
  • As per the norms of the Securities and Exchange Board of India (SEBI), it is mandatory for mutual funds to publish their NAVs on every business day
  • NAV is computed assets minus the expense ratio of a fund. The expense ratio is the summation of all the annual expenses of the mutual fund. These expenses include operating costs, management fees, transfer agent fees, distribution and marketing fees, audit fees and custodian fees.

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