So you are interested to know what Net asset value is and how it’s calculated.
Net asset value or NAV is calculated to know the per unit value of a mutual fund.
A mutual fund is a company that issues and invests in securities.
Here is the formula used to calculate Net asset value or NAV;
NAV = Total assets – Total liabilities
For example, if a mutual fund has shares of different listed companies, financial securities and other assets worth Rs 5,000 crore and has liabilities of Rs 100 crore, the mutual fund’s net asset value or NAV will be Rs 4,900 crore.
As shares and other securities value changes daily, the net asset value of a mutual fund will also change. For instance, if today’s net asset value is Rs 4,900 crore, then at the end of the next trading day, it might become Rs 5,000 crore or Rs 4,800 crore depending how underlying securities perform.
All mutual funds are required to calculate their NAV at the end of each trading day based on the closing prices of the portfolio’s securities.
You need not calculate NAV of the closed-end funds as these are traded on a stock exchange. Per share price of these closed-end funds can be considered as the value at which it is traded in the stock exchange. However, the actual NAV or book value of the fund will always be different from the value at which it’s traded in the market.
After the trading hours, the fund manager calculates the total market value of the securities within its portfolio, adds the additional assets, if any and accounts for liabilities to get the NAV of the mutual fund.
Let us take another example to understand how net asset value is calculated. Suppose, total holding of PQR mutual fund is Rs 102 Crore. Related expenses to this fund will be let us say Rs 2 Crore. In this case, net asset value is Rs 100 Crore (i.e. Rs 102 Crore – Rs 2 Crore).
Net asset value is also calculated in the context of exchange traded funds (ETF). However, like stocks and closed-end mutual funds, ETFs are traded on a stock exchange. Therefore, the value of the ETF can be considered as the value at which it’s traded on a stock exchange.
In our above article, we have discussed how to calculate net asset value or NAV of the mutual fund or its scheme. But these mutual funds are required to find per unit NAV or per-share NAV for a mutual fund.
For instance a fund house might have more than 10 to 15 schemes offering different kinds of assets to be invested with the money collected from investors or unit holders. Mutual fund houses are required to provide per unit NAV of each such scheme.
Why per unit NAV needs to be calculated?
A mutual fund collects money from a large number of investors to invest in various securities such as shares, bonds and in other money market instruments based on its investment objective. In return, these investors get a specified number of shares in proportion to their investment, called units in mutual funds. Pricing of these units or per share in a mutual fund is based on the net asset value or NAV.
A mutual fund investor will always be interested to know how much his investment is worth at a given point of time based on how the fund has performed. To do that he is just required to multiply total units he owns by the per unit NAV of the mutual fund scheme he has subscribed to.
For instance, assume for a moment that you own 1,000 units of an equity fund with XYZ mutual fund. At the end of the trading day, XYZ mutual fund has calculated that per unit NAV of its equity fund is Rs 25. In that case, your value of investment will become Rs 25,000. If your purchase price is Rs 20,000, you are in profit of Rs 5,000.
Net Asset Value of one unit of mutual fund, which is also known as per unit or per share NAV, can be calculated by dividing the scheme’s net asset value by the number of units issued by the mutual fund.
Here is the formula to calculate Per-share NAV;
Per Share NAV = (Total Assets – Total Liabilities) / Total Number of Outstanding Shares
For instance, in our example on how to calculate NAV, the mutual fund’s total net asset value was Rs 4,900 crore. Assume that investors own 49 Crores of units in that mutual fund scheme. Per unit NAV will be Rs 100, which is calculated by dividing Rs 4900 crore by 49 crore of units or shares outstanding.
Similarly, let us take our PQR mutual fund example that we have discussed earlier. If you calculate NAV per unit of PQR mutual fund assuming it has issued 1 Crore units, then NAV per unit is Rs 100 (Rs 100 Crore / 1 Crore)
As per unit NAV is based on how the underlying financial securities perform in the market and the number of units or shares held by the investors in that particular mutual fund scheme, which changes daily based on new investors participation and old investors redemption, the per unit Net asset value (NAV) also changes daily.
All mutual funds calculate their per unit NAV after closing of stock exchanges.
When you buy or sell shares or units in a mutual fund, the value considered to calculate the price you pay or receive depends on the per unit NAV plus any fee that the mutual fund charges.
How does a dividend affect net asset value or NAV?
When a mutual fund distributes dividends to its unit holders, the net asset value or NAV reduces.
As we know a mutual fund’s NAV is calculated by dividing the value of the fund’s net assets by the number of the fund’s outstanding shares. When a fund distributes dividend payments to shareholders, the value of the underlying shares decreases due to which NAV also declines.
If you opt for reinvestment of dividends instead of receiving in cash, then the mutual fund reinvest dividend and issues additional shares or units to you.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
