Net Asset Value (NAV) is a crucial aspect of mutual funds that investors need to understand before investing. It is the value per unit of a mutual fund scheme and is calculated by dividing the total value of the scheme’s assets by the number of outstanding units.
Here, we will discuss in detail how NAV is calculated for mutual funds.
Table of Contents
What is Net Asset Value (NAV)?
Before diving into the calculation process, let us first understand what Net Asset Value is. NAV is the market value of a mutual fund scheme’s assets minus its liabilities, divided by the number of outstanding units. It is the price at which investors buy or sell the units of a mutual fund scheme.
The NAV of a mutual fund scheme changes daily as the value of its underlying assets fluctuates. Hence, investors can track the NAV to know the current market value of their investment.
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How is NAV calculated?
The calculation of NAV for mutual funds is a simple process. The following steps are involved in the calculation of NAV:
- Valuation of Assets and Liabilities: The first step in the Net Asset Value calculation process is to value the mutual fund scheme’s assets and liabilities. The scheme’s assets may include stocks, bonds, cash, and other securities, while liabilities may include expenses such as management fees and administrative costs.
- Deduction of Liabilities from Assets: The next step is to subtract the scheme’s liabilities from its assets. This gives us the scheme’s net assets.
- Dividing Net Assets by the Number of Units: The final step is to divide the net assets by the number of outstanding units. This gives us the NAV of the mutual fund scheme.
For example, suppose a mutual fund scheme has assets worth Rs. 100 crores, and its liabilities amount to Rs. 5 crores. The net assets of the scheme would be Rs. 95 crores (Rs. 100 crores – Rs. 5 crores). If the number of outstanding units of the scheme is 10 crores, the NAV of the scheme would be Rs. 9.5 per unit (Rs. 95 crores / 10 crores).
How Often is NAV Calculated?
As per SEBI regulations, mutual fund schemes are required to calculate Net Asset Value on every business day. This means that investors can track the NAV of a mutual fund scheme daily and make informed investment decisions.
However, the NAV of a mutual fund scheme is calculated after the market closes, so investors cannot buy or sell units at the NAV price during the trading session. Instead, investor’s buy or sell orders will be processed at the NAV price calculated at the end of the day.
Factors Affecting NAV
The NAV of a mutual fund scheme is affected by various factors such as:
- Market conditions: The NAV of a mutual fund scheme is influenced by the performance of the underlying assets. If the market is bullish, the Net Asset Value may increase, and if the market is bearish, the NAV may decrease.
- Expenses: The NAV of a mutual fund scheme is also affected by the expenses incurred in managing the scheme. Higher expenses may reduce the NAV of the scheme.
- Liquidity: The NAV of a mutual fund scheme is influenced by the liquidity of the underlying assets. If the assets are illiquid, the NAV may be impacted.
- Redemption Pressure: If there is a high redemption pressure on a mutual fund scheme, the fund manager may have to sell the underlying assets to meet the redemption demand, which may impact the NAV of the scheme.
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