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How is Mutual Fund NAV Calculated

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The way investors fall over each other to lap up NFOs (New Fund Offers) of mutual funds, it is very obvious that the meaning of NAV of mutual funds remains misunderstood.

How is the net asset value NAV of a mutual fund unit calculated is very important to know so that you can understand the dynamics of mutual fund investing – after all it is your hard earned money and could throw your entire financial planning in disarray.

Let us see with an example how NAV if calculated.

What is Mutual Fund NAV ?

NAV is nothing but the total market value of all the assets held in the mutual fund portfolio less the liabilities, divided by all the outstanding units. That amounts to nothing but the “book value”.

The NAV measures how much each share of a mutual fund is worth. So essentially, the NAV of a mutual fund is the cost of one share of the fund.

How is Mutual Fund NAV calculated ?

The total assets of a mutual fund usually falls into two categories – cash and securities. Securities include stocks and bonds. So the total asset will include the market value of all it’s cash, stocks, bonds. Liquid assets, dividends to be received, interest accrued also need to be included in the total assets.

At the same time, the mutual fund will have some money that it will owe to some creditors. That is it’s liabilities. There will be some expenses that has accrued over time and yet to be paid, this also needs to be included.

Let us see that in a formula.

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

where

Assets = Market value of the fund’s investments + Receivables + Accrued Income

Debts = Liabilities + Accrued Expenses

The market value of stocks and debentures is taken as the closing price on the major stock exchange where it is listed.

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mutual_funds_NAV

Example

As an example, assume there are two investors X and Y who have invested in a mutual fund which decided to issue out units at Rs 1/-.

X invests Rs 100/- and Y invests Rs 200/-.

The total corpus of the mutual fund will be Rs 100 + Rs 200 = Rs 300/- and X will get 100 units and Y will get 200 units.

Now suppose the mutual fund manager invests smartly over a year and makes the investment grow and the corpus becomes Rs 800/-.

The NAV will be calculated as :

NAV per share = (Assets – Debts) / ( Number of Outstanding Units)

= (Rs 800/- 0) / (300)

= 2.67

The NAV is 2.67.

So X’s value of investments will be 100 units * 2.67 = Rs 267/- and

Y’s value of investments will be 200 units * 2.67 = Rs 534/-.

In reality of course, there are liabilities and expense ratios to be taken care of, this is an example just for simplicity.

Other points to note

Mutual Fund NAV is calculated by the fund house itself and in some cases by some accounting firms that the mutual fund might hire for this purpose.

Usually, the calculation of a NAV is impossible during market hours. Because the price of the underlying holdings (say stocks) keeps changing. Though the NAV can be calculated, it would change the next minute or second. Given this, NAVs are usually declared after market closing hours once a day.

As per the regulator SEBI’s guidelines, all mutual funds are required to publish the NAV of their schemes. This is to be at least once a week and in two leading newspapers.

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Note that the NAV is arrived at after deduction of the Expense Ratio of a mutual fund. The expense ratio is the total amount of annual expenses incurred by a mutual fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, marketing and distribution fee, audit fee and custodian fee.

Did this article help you in any way  – if yes, please leave a comment ?

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Comments

  1. Jigar says

    Thanks for this. I did not know about the formula at all. And the expense ratio as well. Please do an article on expense ratio in the future.

    • Radhey Sharma says

      @Rakesh, Appreciate your asking Rakesh. I have nearly fully recovered now. I will do my best to churn out the articles for everyone.

      • Vijay says

        Hello Radhey,

        Hope you are doing good.
        I need to ask one information about the best mutual fund investement which is available in the market now.I have gone through many articles but still in confusion.
        Which company has good returns in the market.I also know it depends on Fund managaer also and the company’s performance over the years.
        Kindly guide me on this.

        I am planning to invest in mutual fund from next year.

        Thanks

        Regards
        Vijay Rajput

  3. Chirag says

    Hey Radhey, Good to here about your recovery.

    You know because of this kind of articles only, one would like to come back this website again and again instead of following many sites and magazines all the time.

    Thanks for this one.

    For me the important take was the below line.
    ‘Note that the NAV of a mutual fund is calculated after deduction of the Expense Ratio of a mutual fund.’
    Never knew this, had some wrong idea about expense ratio ;).

  4. Vivek K says

    Great insight, I had no clue of all this. Thanks Radhey.

    Would it be possible for you to publish calculation of a real MF for better understanding of other components [that were not part of the given example] involved in calculating the NAV?

  8. Ashish says

    It was really helpful……..Thanks a lot……for posting such articles…..better idea on NAV calculation

  9. ajay sharma says

    sir i have invested 20,000 rs in jm financial..I dont know much about nav… I want to knoe the reuturn of my investment if nav is 12.55…

    • Rakesh says

      @Ajay,

      Refer to your MF statement, In that you will have the purchase price, no. of units information. Based on that you can find out the returns.

  10. Swapan Acharjee says

    sir, If a unit of mutual fund’s market price is 128 & its nav is 121 then what is the safe investment price of that mutual fund?? plz. explain with the calculation…thanks

    • TheWealthWisher says

      Swapan, did not quite understand your question.
      What did you mean by “mutual fund’s market price is 128” ?

    • Rakesh says

      @Sanjay,

      I guess the unit price is the base price and fixed at Rs. 10.
      Never came across a fund which quoted less than Rs.10 during IPO.

  14. Dineshkumar K says

    The information provided above is very useful and too descriptive. It’been a great job. Thanks for posting this information.

  18. Manoj mandal says

    It was good to learn lot many things about mutual funds and NAV calculation ,I have some sort of idea about this but i got good clarification about the calculation of NAV.

  20. Deb says

    I need a confirmation. Assuming, today I have a total of 1000 units and the current NAV for my policy is Rs 15 and my monthly premium is 1500. So, I would be allocated 100 units, which would take my units to 1100 and my fund value will be (1100*15=16500). In the next month the NAV changes to Rs 16.7. So, I get lesser units allocated (1500/16.7=90). So total units = 1190. Now my fund value, 1190*16.7 = 19873. So, if my portfolio is doing well, total units added per month goes down, however I gain on the overall units. Is my understanding correct?

  21. Vijay says

    Hello Radhey, Hope you are doing good. I need to ask one information about the best mutual fund investement which is available in the market now.I have gone through many articles but still in confusion. Which company has good returns in the market.I also know it depends on Fund managaer also and the company’s performance over the years. Kindly guide me on this. I am planning to invest in mutual fund from next year. Thanks Regards Vijay

  26. anonymous says

    Does this mean that there is no impact of any late trade on NAV? For example, say I forgot to book a sell trade of 50 units, will this not overstate my NAV? as it meant a reduction in both – numerator and denominator? Would this in vary in case of pension funds?

  32. Sunil says

    I have 2 very basic questions. Could you please clarify.
    1. When you say mutual funds can contain cash – is it that they can contain some plain cash which need not be invested in any stocks or bonds?
    2. Do the number of units in a fund have to equal the actual count of the shares and bonds it has invested in, or is it chosen arbitrarily by the fund manager?

    • Madhupam Krishna says

      Hi Sunil,

      Very good questions…first of all cash means idle money not invested which includes cash in schemes bank account (money come and goes daily for open-ended funds through bank account) plus all cash equivalents like Call Money/CBLO. Sometimes Call/CBLO is also separately mentioned. Sometimes fund managers have sold a stock and payment is credited which is still not utilised. This also forms part of cash holding. Funds also hold cash (generally 3 to 10 Percent) to meet redemptions, these are also part of cash declared by the fund.
      Secondly, No the units and shares/bonds are different in number (actual count), this is why NAV is declared in decimals.

      Keep visiting us for more information. We will be relaunching this blog giving it a complete makeover soon. Do share your views how you feel… Rgds Madhupam

    • Madhupam Krishna says

      Thanx… The site is going a renovation and will be upgraded soon with other services and features. Keep Visiting!!!

    • Madhupam Krishna says

      Thanx… The site is going a renovation and will be upgraded soon with other services and features. Keep Visiting!!!

  35. Rohan says

    Hi,
    I wish to know how does the underlying fund operate for each of the various options under the scheme – like growth option, dividend option, growth plus bonus etc. etc. Each of options has a separate NAV. Do they have assets which are separately managed or there is just one pool of investments i.e. at the scheme level?

    Thanks
    Rohan

    • Madhupam Krishna says

      Hi, Rohan… A very thoughtful question indeed. The NAVs are managed differently for each of the fund options but the portfolio is same. In fact, when a buy or a sell order is put through dealer by the fund manager only scheme name is used. This is because the scheme has just one folio. Later on, NAV is calculated using the number of units outstanding in each option.

  36. Mohan says

    Hello sir,
    Could you please explain how MF companies can continue to issue ‘n’ number of units against SIPS received, when there are only limited # of shares traded in the market. How are the units actually derived ?

    • Madhupam Krishna says

      Hi, Mohan… Buying more share is not a problem as equity market is muck bigger than the MF requirement. To make it understand let me take a simplified scenario. An MF scheme of portfolio 100 Cr with NAV Rs 20. So we have total 5 cr units. The fund gets SIP of rs 2 Cr next day. So additional 10 lakh units are issued at Rs 20 NAV. The additional 2 Cr is used to buy more stocks from the market as decided by fund management and now the corpus becomes 102 cr. Now as the market moves and corpus becomes 105 Cr at the end of the day. The NAV will be 105Cr/5.1 Lakh Units= 20.5882. This is simple illustration just for understanding as more things like fees, redemptions are also adjusted.