WHEN YOU invest your money in any mutual fund, you are allotted units at a certain price.

This
price, measured per unit, is called the NAV or the Net Asset Value of the unit. So, just like a share
is bought and sold at a price, or a bond is traded at a value, a mutual fund is bought and sold at
its NAV. Simply put, a fund’s NAV is its net assets divided by the number of outstanding units.

A mutual fund is a proxy route for investors to access the stock and bond markets. Mutual funds
collect money from investors and buy shares/bonds on their behalf. These investments the fund
makes in the market are its assets. There are, however, some short-term liabilities too in the
fund’s balance sheet. These liabilities and any fund expenses are deducted from its assets to get
the net assets. Net assets are defined as assets minus liabilities. Mutual funds compute the share
of each investor on the basis of the value of net assets per unit, commonly known as NAV.

Sebi’s formula for NAV: Net assets of scheme/Number of units outstanding.

In other words: Market value of investments + Receivables + Other Accrued Income +

Other Assets — Accrued Expenses — Other Payables — Other Liabilities/Number of units
outstanding on the NAV calculation date.

Note: when you sell or buy at NAV, there might be an additional exit or entry load, depending on
the scheme.

Frequency. Sebi stipulates that open-ended mutual funds must disclose their NAVs on a daily
basis, and closed-end schemes at least once in a week, and in at least two daily newspapers.
However, closed-end schemes targeting specific investors like retirees or handicapped people
can publish NAVs on a monthly or quarterly basis, depending on the fund manager’s decision.
However, the final discretion lies with SEBI.

What affects NAV? The direction your fund’s NAV takes depends on a host of factors. These are:

Valuation of investments. As NAV is the price of the fund’s securities, it is important that these
be valued correctly. While listed securities are easily valued using daily closing prices, untraded
or thinly traded securities are trickier. Sebi lays down strict guidelines for their valuation, and also
defines untraded/thinly traded security for more transparency.

Purchase/sale of securities. Ultimately, a fund’s performance depends largely on the fund

manager’s management abilities. Eventually, so does your NAV. The fund manager decides
which stocks to buy, and when to sell. And this impacts your NAV.

Other assets & liabilities. Other assets include any income due to the fund but not yet received–
like company dividends. Other liabilities include expenses payable from the scheme, including
AMC fees that are paid to your Asset Management Company for managing your funds.

Units sold & redeemed. Your NAV is affected each time an investor buys into the fund or sells
units. As the NAV is largely shared profits made from the fund’s investments, the more the
number of units, the less the share per unit and vice-versa. In reality, fund managers handle it
differently. Increased number of units implies more inflows and this allows the fund manager to
buy more stocks or increase exposure in the stocks the fund already holds.

Your fund’s NAV is adversely impacted when there is a large-scale redemption of units. Usually,
all mutual funds maintain a small cash reserve to meet redemption, but large-scale redemption
may force the fund manager to sell stocks to raise the money. If this is done at an unfavourable
price, your NAV will suffer. If your fund manager sells stocks expected to go up in future, the
interests of existing investors is affected as they are deprived of future gains.
Dividend distribution. Any gains like dividends that are distributed from your portfolio ultimately
come from your NAV. Since dividends are paid out of your NAV, it will be reduced to the extent of
the amount paid. If your scheme’s NAV is, say, Rs 10 and it goes up to Rs 15, and the fund
decides to pay a dividend of Rs 5, your NAV will be reduced by Rs 5 to come back to Rs 10. The
Rs 5 comes to your hands as dividend income.

Thus, the NAV of your scheme on any day reflects the realisable value of your investments
(multiplied by the number of units held) on that day.