How is NAV of a Mutual Fund Scheme Calculated?
The most common objective behind investing in mutual funds is to benefit from capital appreciation and build a substantial corpus to meet various financial goals. While mutual funds are often misconstrued as a complex investment instrument, in reality, their investment strategy is fairly straightforward. They provide a slew of advantages to investors, including diversification, expert money management, economies of scale, transparency, and liquidity.
It is a natural human instinct to examine the pricing of a product or service before purchasing it. Accordingly, when it comes to mutual funds, a similar trend may be seen as many investors end up looking at its price or NAV.
What is a Mutual Fund NAV?
Mutual Fund NAV or Net Asset Value indicates the market value of a single unit of a mutual fund scheme on a certain date. It is the price per unit of a mutual fund scheme at which they are allotted to the investors. In other words, an investor has to pay this price for buying units of a particular mutual fund or receive this price while selling units back to the fund.
Unlike share prices which change constantly during the trading hours, the Mutual Fund NAV is determined on a daily basis. It is computed and disclosed at the end of the every business day on or before 11 p.m. of the same business day, based on the closing price of all the underlying securities that the respective mutual fund scheme holds after adjusting for the expenses. Whereas Fund of Funds are allowed time till 10 a.m. the following business day to update the information.
While the NAV moves up with appreciation in the value of the underlying securities, it moves down if the underlying securities register depreciation in value.
How is Mutual Fund NAV Calculated?
The Mutual Fund NAV calculation is one of the least understood concepts. Many investors do not understand its relevance and even end up making uninformed investment decisions after seeing the change in NAV.
Mutual Fund NAV calculation is nothing but the computed by taking, Market or Fair Value of Scheme's investments (+) Current Assets (-) Current Liabilities and Provisions Divided by No. of Units outstanding under the Scheme on the valuation date .
Mutual Fund NAV = [Total Assets – (Total Liabilities + Expenses)] / Number of Outstanding Units
Here’s an example of Mutual Fund NAV Calculation:
A mutual fund scheme ‘A’ has an investment value of Rs 124 lakh, based on the day's closing prices for each asset. On the other hand, the fund has Rs 3 lakh in short-term liabilities and Rs 1 lakh in expenses. The fund has 6,00,000 units outstanding.
The NAV is calculated as: [Rs 1,24,00,000 – (Rs 3,00,000 + Rs 1,00,000)] / 6,00,000 = Rs 1,20,00,000 / 6,00,000 = Rs 20.
Thus the NAV of Mutual Fund scheme ‘A’ is Rs 20 per unit. So, if you invested Rs 1 lakh in scheme ‘A’, you will be allotted 5,000 units.
However, in reality, the asset and liabilities may be more to define the NAV of a scheme, such as cash equivalents, accrued income and operating expenses, management expenses, distribution, and marketing expenses, etc.
Each mutual fund scheme is a basket of equity and related securities and /or debt & money market instruments held in the portfolio. As equities and debt instruments are traded in the secondary market, their value keeps fluctuating. Any change in the price of the securities held influences the Mutual Fund NAV and determines how many units get allotted to investors for his/her investment amount. This indicates that the Mutual Fund NAV varies based on market conditions and the NAV at which the investor buys units today will not be the same tomorrow. The Mutual Fund NAV today may even depreciate in future due to unfavourable market conditions.
Effective February 1, 2021, mutual fund houses need to distribute units only after the funds have been realised and available to the scheme as per cut off timing. The term 'realization of funds' refers to the fact that the NAV applicable to your transaction will be determined by when the fund house has received your money.
Now, should you base your investment decisions on the NAV of a mutual fund scheme?
Many investors still place greater emphasis on mutual fund schemes NAV. Similarly, some people still feel that schemes with a lower NAV are cheap and can rise at a higher pace. However, a lower NAV does not imply a less expensive scheme, whereas a higher NAV does not mean the scheme is expensive.
Moreover, every mutual fund scheme offers two plans i.e. direct plans and regular plans. Under a direct plan, investors can buy the fund directly from the AMCs, bypassing the fund distributors. As direct plans do not charge any distribution fees, difference in their NAV is genrealy the distribution fees. As a result, the direct plan of a mutual fund scheme will report a higher NAV compared to the regular plan.
It can be concluded that a lower/higher NAV is related to the scheme's worth at a given point in time, or, to put it in another way, the cost of purchasing a mutual fund unit has little to do with its return potential. When choosing a mutual fund scheme, investors should not base their judgments on its NAV.
As a result, whether the NAV is lower or higher shouldn't affect your investing decision. The decision to invest in a mutual fund scheme should be based on its suitability to your risk profile, its performance, investment strategy, and the pedigree of the investment manager.
Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


















