Computation of NAV of MF & how it helps to assess the fund's performance

Everything you buy has a price, and this is true for investing too. But what is the price of a mutual fund? How much do you need to pay to invest in a fund’s scheme? This amount will depend on the fund’s net asset value or NAV, which is the price at which the fund is bought and sold in the open market. The NAV represents the price of one unit of the mutual fund. For example, if a fund’s NAV is Rs 20 and you want to invest Rs 10,000, you will be allotted 500 units in the fund.

The NAVs of funds are reported widely in newspapers and investment portals. In fact, open-ended funds are mandated to disclose their NAVs on a daily basis while close-ended schemes usually disclose their NAVs on a weekly basis.

What constitutes a fund’s NAV?

The asset allocation mix of a mutual fund includes securities and cash. Securities comprise of equities, bonds and other debt instruments. The values of these securities change at every trading interval and so does the NAV of the mutual fund. The NAV is the total market value of all the assets held in the mutual fund portfolio less the liabilities, divided by all the outstanding units. The market value of the investments is calculated according to the last traded or closing price of the securities.

Usually, the calculation of an NAV is tedious during trading hours as the price of the underlying holdings (especially stocks) keeps changing. Though it is theoretically possible to calculate the NAV during trading hours, it is bound to change the next minute. Given this, the NAVs are usually declared after market closing. The costs and expenses of the fund, such as management fee and operating expenses (registrar and transfer agent fee, marketing and distribution fee, audit fee and custodian fee) are deducted while calculating the NAV.

The NAV of an open-ended fund does not state whether a fund is overpriced or under-priced. In other words, a fund with a high NAV does not mean that it is more expensive in relation to a fund that has a low NAV. It only indicates the market value of the investment portfolios, and has nothing to do with valuation terminology of premium or discount.

Closed-ended funds issue a fixed number of units that are traded on the stock exchanges or in the over-the-counter market. Typically, such funds do not trade at their NAVs and their prices tend to generate premium or discount relative to their NAVs due to the demand and supply factors.

Uses of NAV

The NAV helps in assessing the performance of the fund. Various analysis tools like point-to-point return, CAGR and ROI, are derived using the NAV of the fund. Moreover, advanced analysis of risk-adjusted returns, such as Sharpe and Treynor ratios, alpha and beta are not possible without the NAV.

A fund’s NAV helps the investors to assess the worth of their investments and determine how the value of the investments has moved over time. For instance, in 2010, you purchased 1,000 units of a fund at Rs 15, so your investment was Rs 15,000. After two years, the NAV rises to Rs 20. This means that the value of your investment has grown to Rs 20,000 and if you redeem the units now, you will make a profit of Rs 5,000. Moreover, the base of investment strategies like SIP, SWP and STP rests on the NAV of the fund.