rediff.com: Understanding NAV


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June 12, 2000

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Sameer Doctor

As a convenient means of keeping accounts, the mutual fund issues units of a face value of Rs 10 each. The net asset value (NAV) is the current value of one unit of the fund. Hence, the growth in value of your investments is reflected in the NAV of the fund.

How it's calculated

Market / fair value of the investments
+ Accrued income + Receivables + Cash and other assets
- Accrued expenses - Payments and other liabilities

Let's work it out with an example:

Assume a very small mutual fund has an initial investment of 1,000 units
Each unit is worth Rs 10
Hence, the total amount with the fund is Rs 10,000
This amount is invested in one share of Infosys (Rs 7,200), one share of SSI (Rs 2,400) and the balance Rs 400 is held in cash

Let's assume that after some time, the value of the shares goes up to Rs 10,400 (Infosys), Rs 3,900 (SSI) and expenses incurred amount to Rs 240. The NAV will be:
(10400+3900+400-240) / 1000 units = Rs 14.46

Thus, the investors in this hypothetical fund have achieved an absolute return of 44.6 per cent during the period.

What if during this interval, the market value of Infosys or SSI drops below the price at which the fund invested? Then the NAV may have temporarily fallen below the entry NAV of Rs 10, meaning a short-term loss of value. A well-managed portfolio will minimise this by investing in a mix of shares, so that hopefully any loss of value of one will be compensated by appreciation in the other shares.

Corpus

Any further investment into the fund will be at the current NAV. The total amount invested, say Rs 11,000 (Rs 10,000 as the original investment plus an additional Rs 1,000 invested now) is called the corpus or the total amount of invested money.

AUM

The total money managed by the fund is the present Rs 15,460 (present value of Rs 14,460 plus Rs 1,000 invested now). This figure is referred to as assets under management (AUM) and is used as a measure to compare the size of various funds. A very small fund may not have the assets to meaningfully deploy to achieve the objective of risk control through diversification. After all, it would be able to buy only small quantities of fewer stocks. Typically, any fund having over Rs 50 crore of AUM would be in a reasonable position to achieve its objectives.

Load

Sometimes, you can subscribe to a fund by paying a small premium to the current NAV (usually about 2 per cent). This premium is called the entry load and is meant to take care of initial account opening and transaction processing expenses.

On the other hand, the fund may decide to recover the expenses at the time of your leaving the fund. In that case, the redemption price will be at a slight discount to the current NAV. This is the exit load and is usually more prevalent among debt funds, and is normally applied when the investment is for a short period.

Sometimes a fund is available for both subscription and redemption at the NAV itself, and is called a no-load fund.

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