Net asset value (NAV) represents the per share market value of a mutual fund. It is one of the most important metrics when evaluating and comparing between mutual funds. It is calculated as the value of asset less the values of liabilities per unit on a day. NAV can be used while dealing with any suitable business entity or financial product that involves the accounting concepts of assets and liabilities.
Formula for Mutual Fund NAV
The formula for mutual fund is derived by dividing the total value of all the cash and securities in a fund’s portfolio, minus any liabilities, by the number of shares outstanding. An NAV computation is done once at the end of each trading day based on the closing market prices of the portfolio’s securities.
NAV Formula= (Assets – Liabilities) / Total number of outstanding shares
Basic Working of a Fund
A fund basically works by collecting money from a large number of investors. The collected capital is then used to invest in a variety of stocks and other financial securities that fit the investment objective of the fund. Each investor has a specified number of shares which are in proportion to their invested amount. The investors are free to sell (redeem the value of) their fund shares at a later date and pocket the profit/loss. The regular buying and selling (investment and redemption) of fund shares start after the launch of the fund hence, a mechanism is required to price the shares of the fund. This pricing mechanism is based on the concept of NAV.
NAV for Mutual Funds
Unlike a stock/share whose price changes with every passing second, mutual funds don’t trade in real time. Instead, the price of mutual funds are, based on the end of the day methodology based on their assets and liabilities.
The assets of a mutual fund include the total market value of the fund’s investments, receivables, cash and cash equivalents and accrued income. The market value of the fund is computed once per trading day based on the closing prices of the securities held in the fund’s portfolio. Since a fund may have a certain amount of capital in the form of liquid assets and cash, that portion is accounted for under the cash and cash equivalents heading. Items like dividend or interest payments applicable on that day are included in receivables, while the money that is earned by a fund, but yet to be received is referred to as accrued income. Sum, total of all these items and any of their qualifying variants constitute the fund’s assets.
The liabilities of a mutual fund typically include pending payments, money owed to the lending banks and a variety of fees and charges owed to various associated entities. Additionally, there might be a possibility that a fund has foreign liabilities like shares issued to non-residents, income or dividend for which payments are pending to non-residents, and sale proceeds pending repatriation.
To calculate the NAV for a particular day, all these items falling under assets and liabilities are taken as of the end of a particular business day.