Each stock has a price at which we buy it. Similarly, mutual fund units have Net Asset Value (NAV) at which they can be bought.
When we invest in a mutual fund scheme, we buy the units of that scheme. The Net Asset Value (NAV) is the price of a single unit of the mutual fund scheme. Now, we will understand how NAV is calculated using a very relatable example.
Suppose Mayank is a stock market expert who has been investing for years and has successfully generated double-digit yearly returns. All the people around him keep asking him for tips. So, he thinks, "I shall start managing money for my friends as they don’t know much about the stock market."
Of all the friends, Suraj, Madhusudhan, Arpit, Jayesh, and Omkar agree to provide Rs. 2,00,000 each to Mayank for the investment. They decide to pool their money. And the total contribution made by all five of them is Rs. 10,00,000.
Now Mayank decides to invest that money in stocks. He comes out with the list of stocks in which the pooled money will be invested. Once the investment of Rs. 10,00,000 lakh is made, it is his responsibility to allot the fund units based on their contributions.
Before making the allotment, let’s decide the notional value of the investment. You can consider the notional value as the initial price of the unit. In the beginning, the notional value can be anything like Rs. 5, 10, 50, or 100.
Let’s assume Mayank fixes the notional value to be Rs. 10. Based on the investment amount, we will now assign units to each investor.
As we know, Madhusudhan has invested Rs. 2,00,000, so he will get Rs. 2,00,000/10 units, which is 20,000 units. As all the friends have invested the same amount, everyone will receive 20,000 units.
Now the fund is live, and after the first year, the investment of Rs. 10,00,000 becomes Rs. 11,50,000, which is a 15% increase on the entire investment amount.
What will be the NAV of the fund after an increase in the underlying amount?
The NAV of each unit will also increase proportionately by 15%, which is 10*(1+0.15) = Rs. 11.5.
The NAV of the fund keeps changing every day. It is calculated at the end of the day when the market closes. It is calculated by dividing the total value of the underlying securities by the number of outstanding units.
Here, we can see that Mayank generated 15% returns in the first year. But we have assumed that Mayank is not charging anything for this fund management (As the investors are his friends). But if Mayank decides to charge for his services, then the formula of the NAV will also include those expenses (more on this below). In the real world, there are many additional expenses for the AMC like marketing and operational costs. So, NAV is calculated as
NAV =Total asset value - expenses / total number of units
You can find the NAV of any mutual fund right below its name on the fund page. The NAV of Parag Parikh Flexi Cap Fund is shown below (in yellow).
NAV stands for Net Asset Value, it is the price of a single unit of a mutual fund. NAV is calculated daily at the end of the day by dividing the total market value of the underlying securities by the total outstanding units.
The cutoff time for mutual funds in India is 3 PM. If an investor places the order before 3 PM. then he/she will get the units at the NAV of the same day. If the order is placed after 3 PM. NAV of the next day will be considered.