Net Asset Value – This is the fund’s unit price or per-share price. The fund’s NAV varies depending on the performance of the fund. Units are bought or sold/redeemed at the time of purchase/sale at the prevailing NAV or unit price.
You should be familiar with the term ‘Net Asset Value’ (NAV) as a mutual fund investor. That can help you determine the performance of a particular mutual fund scheme over time. Simply put, NAV is the market price per unit of all the securities held by the mutual fund scheme.
The NAV is calculated by dividing the total net assets of the mutual fund by the total number of investor units issued. To obtain the total net assets of a fund, subtract any liabilities from the current value of the assets of the mutual fund and then divide the figure by the number of total units. The result is the NAV of the mutual fund.
The formula of NAV is:
Net Asset Value (NAV) = (Asset – liabilities) / Number of outstanding units
Assets = market value of mutual fund investments + receivables + earned income
Debt = Liabilities + Expenditure (earned)
The NAV per unit on any given day is calculated as the NAV of the fund divided by the number of outstanding units of the plan on that day only.
If the market value of the shares of the mutual fund scheme is Rs 10 crore, net of all liabilities on a given day and the mutual fund has 1 million units outstanding on that day, and the NAV will be Rs 10 per unit.
The calculation of NAV using the ‘Unitary Method’ is a simple process.
The Unitary Method simply means that if I buy 50 apples in ₹50/-, the cost of each apple will be ₹1/-
The formula of NAV is, find out the net assets of the fund in the market, subtract expenses/liabilities, and then divide by the number of total outstanding shares in the market.
As such, the fund has a net worth of 100 crores in the market and says there are one crore outstanding units in the market.
NAV will be 100 crore / 1 crore, which is Cr ₹100 / unit.
Whereas if we assume that the expense of the plan is 2%. The NAV would be in this case:
(100 crores – (2% of 100 Crores))/1 Crore
Thus the NAV becomes ₹ 98 / unit.
At any given time, a fund’s NAV is the sum of the market value of the asset (securities that can be debt, equity, or both) in which its portfolio is (popularly known as AUM Assets under management), net of any liabilities at that time.
As the market price of securities changes per day, the NAV of a scheme, as opposed to stock pricing, depends on market demand and supply (i.e., buying and selling).
Note: At the end of the market day, the NAV of a mutual fund is always calculated. It is due to daily changes in the market value of securities. As a result, the NAV of a mutual fund often changes every day.