One of the most common terms you come across while investing in mutual funds is its NAV or the net asset value. It is essential to know the NAV when you buy the units of a mutual fund or when you plan to sell them. NAV is defined as a fund's market value per share. Simply put, the NAV of a fund is its price per unit. If the NAV of a fund is Rs 100, it means that you can buy one unit of the fund at Rs 100. If you are investing Rs 1,000 in this fund, you will get 10 units.
Calculating the NAV
The NAV of a fund is calculated on a daily basis. It is derived by dividing the total current market value of all the securities in the fund's portfolio (minus the liabilities) by the number of outstanding fund shares. It is calculated based on the closing market prices of the securities in the fund's portfolio.
The NAVs of funds change daily and are calculated by the respective fund houses. Some fund houses get the NAVs calculated or their investments valued through independent entities like banks. They are required to adhere to specific regulations and guidelines laid down by the market regulator, the Securities and Exchange Board of India (Sebi), while valuing their investments.
How it works
A fund's buy and sell orders are processed at the NAV of the trading date. If you buy an
MF scheme before 3 p.m. on a business day, that is the day the markets are open, you get it at the NAV of that day. If you buy it after 3 p.m., you will get it at the NAV of the next business day. Suppose it is Monday and the NAV of a fund is Rs 60. If you buy this fund at 2.30 p.m. on Monday, you will get it at an NAV of Rs 60. But if you buy it at 3.30 p.m., you get it at the NAV of the next day, which is calculated at the end of the day on Monday.
NAV and loads
The NAV of a fund is also affected by loads. It is reduced by the entry load when you are buying a fund and exit load (if applicable) when you are redeeming the fund, that is, selling the units of the fund. Consider a fund with an NAV of Rs 100, which charges an entry load of 2.25%.
If you pay Rs 1,000 to buy 10 units, you will get 9.775 units as only Rs 977.50 is invested. The rest of the money, that is Rs 22.50, is deducted as entry load. Now consider a situation when you own 10 units at Rs 100 per unit. You want to redeem the fund and the exit load is 1%. In this case, the NAV will be Rs 99, so instead of getting back Rs 1,000, you will only get Rs 990. Here, Rs 10 is deducted as exit load. Exit loads are not charged every time. These are usually levied if you redeem the units within a short period of investing, which is six months to a year.
The formula used to calculate the repurchase price for a scheme with an exit load is:
Repurchase price = NAV x (1 - Exit load)
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