What is Net Asset Value (NAV)? Valuation of NAV and Its Calculations

Every time you buy units of a Mutual Fund Scheme you pay a price for that.  Let’s discuss only the Price which we actually pay for buying units.  The Price of Fund’s Units is called Net Asset Value (NAV).   

It is the value calculated after taking in to account of all the incomes and expenses, Capital Net worth, Liabilities and the Market price of the shares bought and deposits made.

What is Net Asset?

Net Asset is calculated by deducting all the liabilities of the scheme from its Assets.

What are the Assets and Liabilities of a Scheme?

Market value of the shares, Bonds, Debentures purchased by the scheme and Bank Deposits made by the scheme and other Current Assets it holds as on date are the assets of a mutual fund’s scheme.

Total Share capital (the value of units issued), Profit made, Capital Appreciation of the Shares and Current Liabilities of a scheme are the liabilities.

What is Unit Holders’ Share?

The purchasers of the units of the scheme are the Unit Holders.  Unit Holders’ Share includes the following:

Total Subscribed Capital: Suppose, a scheme sold/issued 10 Crores of Units at Rs.10/- the total Subscribed Share Capital of the scheme is Rs.100 Crores also called Mobilised Capital.

Profit of the Scheme: If the total income of the scheme derived from Interest and Dividends is Rs.7 Crores and Expenses is Rs.5 Crores, the Profit will be Rs.2 Crores.

Capital Appreciation: If the scheme invested Rs.70 Crores (buying price of the shares) out of the mobilized capital of Rs.100 Crores in shares, and the market value of the shares is appreciated by 15% then the value of Capital Appreciation is Rs.10.50 (Market value of the shares invested).

Income and Expenses of a Mutual Funds Scheme is as follows:

Incomes:

Interest Income: Interest received or receivable from Deposits in Banks made by the Scheme

Dividend Income: Dividend received or receivable from securities invested

Capital Gains: Gains from the sale of securities.

Valuation Gains: If Market value of the securities being held is more than the purchased value, it is the Valuation gain for the Scheme

Expenses:

Capital Loss: Losses from the sale of securities held by the Scheme.  When the securities are sold and the value is less than the purchased value, the Scheme suffers loss from Capital.  It is called capital loss.

Valuation Loss: If Market value of the securities being held is less than the purchased value, it is the Valuation loss for the Scheme

Scheme Expenses: Expenses like Distributors commissions, Salary of Employees and Fund Managers, Sales and Promotional Expenses, etc.

Taxes: Dividend distribution tax, Securities Transaction Tax paid by the scheme

Sample Balance Sheet of a Scheme:

In the above sample Balance Sheet, you can find Bonds, Debentures and Bank Deposits (25 + 5) is Rs.30 Crores in which the scheme has invested out of the total available Unit Holders’ Share (100 Crores – 70 Crores).  It has purchased shares worth of Rs.70 Crores and it has appreciated at 15% to be valued for Rs.80.50 Crores.

Calculation of NAV

There are two methods for calculation of NAV.  Before we discuss about the same, we need to find the Unit Holders Share.  The Unit holders share is calculated as below:

Here the Unit Holders Share = Capital + Profit + Capital Appreciation, i.e. Rs.112.50 (100.00 + 2.00 + 10.50)

First method:

Deduct the liabilities except unit holders’ share from total assets and divide it by the number of units sold/issued.

NAV = Total Assets – Liabilities (excluding Unit Holders’ Share) / No. of units issued,

Rs.11.25 = (114.50 – 2.00) / 10 Crores

Second Method:

An another method of calculation NAV is, divide the unit holder’s share by the number of units sold/issued by the scheme.

NAV = Unit Holders’ Share / No. of Units

Rs.11.25 = 112.50 / 10 Crores

So, you have come to know what the NAV of your scheme is.  Whenever you find your NAV is going up and going down, and sometimes not moving at all, don’t be confused just analyse the Balance Sheet.  NAV determines your investment appreciation.  If there is no upward movement of the value of NAV for long time considering the market status, you need to think of exiting from the scheme.