Mutual Fund NAV Calculation

The net asset value is the market value of the assets of the scheme deducting its liabilities. The net asset value per unit on any business day is computed as follows:

NAV = (Market value of the fund’s investments + Receivables + Accrued income -Liabilities -Accrued expenses)/Number of units outstanding

Rules governing the NAV calculation:

1. Accrued Income and Expenses: The correct accrual of all incomes and expenses is a requirement for computing NAV. In practical terms these are just estimates. For example, the investment manager’s fees has to be accrued everyday for computing NAV but the fee is based on weekly average of net assets. Changes in NAV due to the assumptions about accruals should not impact NAV by more than 1 %.
2. Sale and Purchase of Securities and Units: The purchase and sale of securities has to be recorded in the books of the fund, and this impacts the net assets of the fund. Sale and repurchase of units alters the number of unit holders outstanding in the fund and impacts the denominator of the NAV equation.
3. Initial Expenses: When a mutual fund scheme is launched, certain expenses are incurred. These relate to printing and mailing, advertisements, commission to agents, brokerage, stamp duty, marketing, and administration known as initial or pre-operational expenses, they are linked to the corpus of the scheme. The fund has to give a break up of these expenses in the prospectus.
4. Recurring Expenses: Apart from the initial expenses, mutual funds incur recurring expenses every year. These expenses include items like the asset management fees, registrar’s fees and custodial fees and are charged to the profit and loss account of the scheme.
5. Sales and Repurchase Load: Sales or front-end load is a charge collected by a scheme when it undertakes fresh issue of units or shares. Suppose a mutual fund issues Rs.1,00,000 worth units having a face value of Rs.10 each. The company incurs some initial issue expenses, which may be around 1% of the face value, or in other words, the company may levy an entry load. Schemes that do not charge a load are called ‘No Load’ schemes. Repurchase or ‘Back-end’ load is a charge collected by a scheme when it buys back the units from the unit holders. It is because of the front-end and back-end loads the mutual fund schemes are at a premium and repurchased at a discount to NAV. Repurchase price is usually less than the reissue price.

Credit: Investment Management-KU