NAV of a Mutual fund

The performance of a mutual fund scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on a weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published.

All mutual funds are also required to put their NAVs on the web site of the Association of Mutual Funds in India (AMFI). Investors can access NAVs of all mutual funds at one place. The NAV is the most common denominator which summarizes the entire performance of the fund.

Mutual funds are also required to publish their performance in the form of half yearly results which also include their returns/yields over a period of time i.e. past six months, one year, three years, five years and since inception of schemes. Investors can also look into other details like expenses as a percentage of total assets as this has an affect on the yield.

In addition, mutual funds are also required to send annual reports, or abridged annual reports, to the unit holders at the end of the year. These contain details of investments made by the fund in addition to the other financial information.

Various studies on mutual fund schemes, including yields of different schemes, are published. Many research agencies publish research reports on performance of mutual funds including ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves apprised about the performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity-oriented schemes with the benchmarks like BSE Index, Sector Index, Nifty etc.

The mutual funds are required to disclose full portfolios of all of their schemes on a half-yearly basis. Some mutual funds send newsletters to the unit holders on a quarterly basis which also contain portfolios of the schemes.

Some mutual funds send information about the portfolios to their unit holders. The scheme portfolio shows investments made in each security i.e. equity shares, preference shares, debentures, money market instruments, government securities etc, and their quantity, market value and percentage to NAV.

These portfolio statements also required to disclose illiquid securities in the portfolio, investments made in rated and unrated debt securities, non-performing assets (NPAs) etc. On the basis of the performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

It is to be noted that the past performance of a mutual fund may not be a true indicator of its future prospects. A fund launched at a time when markets are low may show comparatively better results vis-a-vis a fund launched when the markets are booming. Moreover, the regularity of dividend payments, amount of dividend payments, bonus issues, and entry/exit charges also affect the performance of a mutual fund.

Ultimately, the performance of a fund would depend on the sector in which its investments have been made, and the stocks in which the investments have been made.

NAV: Fund’s assets minus liabilities

The market price of the units is based on the net asset value (NAV) of a fund. The buying and selling rates are fixed based on the NAV. Most funds levy an entry and exit load on the purchasing and selling investors respectively.

The NAV constitutes one of the major parameters to evaluate the performance of any mutual fund. It is by far the most commonly used denominator for comparison. Mutual funds are ranked as per their NAVs. It summarizes the entire details of the fund performance and gives signs of the future trend you can expect.

The NAV of a fund is the cumulative market value of the assets of the fund, net of its liabilities. If the fund is dissolved or liquidated, by selling off all the assets held in the fund, this is the amount that the unit holders would own. NAV per unit is the value of ownership of one unit in the fund. It is calculated by dividing the net asset value of the fund by the number of units.

The most important step in calculation of NAV is the valuation of the assets owned by the fund. Once the asset valuation is done, the NAV is simply the net value of assets divided by the number of units outstanding. Asset value is equal to the sum of market value of shares, debentures, and bonds held, plus any liquid assets and cash held, plus any dividends and interest accrued.

Out of this, the liabilities and expenses are deducted to find the net asset value of the fund. For listed shares, debentures, and bonds, the valuation is done on the basis of the closing market price on the principal exchange where the security is traded. For unlisted and illiquid securities, thinly-traded shares, debentures, and bonds, the value has to be estimated.

Different methodologies may be followed. For shares, the valuation could be based on the book value per share or an estimated market price. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a reverse direction to the interest rate changes. The asset management company should use generally-accepted principles of valuation and disclose it for the information of the investors.

Interest is payable on debentures and bonds on a periodic basis. Interest is accrued on the basis of number of days the security is held. Accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date.

Dividends are proposed at the time of the annual general meeting and become due on the record date. There is a gap between the date on which it becomes due and the actual payment date. In the intermediate period, dividends are deemed to be accrued.

Deductions are made of the liabilities. Also, expenses including management fees, custody charges etc are to be deducted. The quality of investments has a direct impact on the NAV of a mutual fund. A higher NAV indicates better investments and fund management.

Depending on the policy of the fund the NAVs are declared on a periodic basis which may be daily, weekly or at other intervals.

Comments are closed.