Mutual Fund NAV

Net asset value (NAV) represents a fund's per share market value. This is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities. For example, if a fund has assets of $50 million and liabilities of $10 million, it would have a NAV of $40 million. This number is important to investors, because it is from NAV that the price per unit of a fund is calculated. By dividing the NAV of a fund by the number of outstanding units, you are left with the price per unit. In our example, if the fund had 4 million shares outstanding, the priceper-share value would be $40 million divided by 4 million, which equals $10. This pricing system for the trading of shares in a mutual fund differs significantly from that of common stock issued by a company listed on a stock exchange. In this instance, a company issues a finite number of shares through an initial public offering (IPO), and possibly subsequent additional offerings, which then trade in the secondary market. In this market, stock prices are set by market forces of supply and demand. The pricing system for stocks is based solely on market sentiment. Because mutual funds distribute virtually all their income and realized capital gains to fund shareholders, a mutual fund's NAV is relatively unimportant in gauging a fund's performance, which is best judged by its total return. A mutual fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. Investopedia explains 'Net Asset Value - NAV' In the context of mutual funds, NAV per share is computed once a day based on the closing market prices of the securities in the fund's portfolio. All mutual funds' buy and sell orders are processed at the NAV of the trade date. However, investors must wait until the following day to get the trade price. Mutual funds pay out virtually all of their income and capital gains. As a result, changes in NAV are not the best gauge of mutual fund performance, which is best measured by annual total return. Because ETFs and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar value above (trading at a premium) or below (trading at a discount) NAV. Net asset value (NAV) is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the U.S. Securities and Exchange Commissionare redeemed at their net asset value. However, the term may also be used as a synonym for book value or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors and, thereby, represent the net asset value per share. 1

Net asset values and other accounting and recordkeeping activities are the result of the process of Fund Accounting, sometimes called securities accounting, investment accounting and/or portfolio accounting. Fund Accounting systems are sophisticated computerized systems used to account for investor capital flows in and out of a fund, purchases and sales of investments and related investment income, gains, losses and operating expenses of the fund. The fund's investments and other assets are valued on a regular schedule such as daily, weekly or monthly, depending on the fund and associated regulatory or sponsor requirements. There is no universal method or basis of valuing assets and liabilities for the purposes of calculating net asset value used throughout the world, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation and any regulatory and/or accounting principles that may apply. For example, for US registered open-ended funds, investments are commonly valued each day the New York Stock Exchange is open, using closing prices (meant to represent fair value), typically 4:00 PM Eastern Time. For US registered money market funds, investments are often carried or valued at 'amortized cost' as opposed to market value for expedience and other purposes, provided various requirements are continually met. At the completion of the valuation process and once all other appropriate accounting entries are posted, the accounting books are 'closed' enabling a variety of information to be calculated and produced including the net asset value per share. Open Ended Funds Net asset value is most commonly used in the context of open-ended funds. Shares and interests in such funds are not traded between investors, but are issued by the fund to each new investor and redeemed back to the fund when an investor withdraws. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash. As a numerical example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share", being the price at which the shares will be issued, is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be US$240MM, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to 1/6 of the fund's value when he withdraws his investment, proportionately adjusted for any subsequent profits or losses. The valuation of the assets and liabilities of an open-ended fund is therefore very important to investors. If the NAV in the above example had, with the same assets, been calculated as US$160MM (and the NAV per share as $160), the investor would have been given 250,000 shares and would become entitled to 1/5 of the fund's value. In contrast, closed-end funds are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree it to be, which may not correspond to the fund's NAV. Publicly traded shares in such funds generally trade at a price below NAV. Valuation of assets in open-ended funds The NAV of a collective investment scheme (such as a US mutual fund or a hedge fund) is calculated by reference to the total value of the fund's portfolio (its assets) less its accrued liabilities 2

(money owed to lending banks, fees owed to investment managers and service providers and other liabilities). The portfolio's assets are generally valued by objective criteria established at the outset of the fund. Where assets are traded on a securities exchange or cleared through a clearing firm, the most common method of valuation is to use the market value of the assets in the portfolio(using, for example, the closing bid price or last traded price). The value of OTC derivatives may be provided by the counterparty to the derivative, who may be trading similar derivatives with other parties. Where there is no objective method of calculating the value of an asset, the fund manager's own valuation methods subject to a fund's directors or trustees is usually used. Mutual Funds - Net Asset Value (NAV) The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention. Calculation of NAV The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below. Asset value is equal to Sum of market value of shares/debentures + Liquid assets/cash held, if any + Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid Details on the above items For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. 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 direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation. Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, 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. 3

Usually, dividends are proposed at the time of the Annual General meeting and become due on the record date. There is a gap between the dates on which it becomes due and the actual payment date. In the intermediate period, it is deemed to be "accrued". Expenses including management fees, custody charges etc. are calculated on a daily basis Mutual Funds NAV Calculations The Net Asset Value is the funds share price. The NAV is calculated by dividing the current value of the portfolio by the number of fund units (shares) outstanding. NAV for most funds is calculated on daily basis and is available in daily financial papers. Suppose there are three investors in a mutual fund A, B and C. A invests 2$. B invests 3$. C invests 5$. Suppose the Mutual Fund company decides to initially issue shares (units) at 1$ each. Thus initial corpus of the Mutual Fund will be 2+3+5 = 10$. A will get 2 units. B will get 3 units. C will get 5 units. Now suppose the fund manager invests 3$ in Company 1, 3$ in Company 2 and 4$ in Company 3. After one year Value of investment in Company 1 = 5$ Value of investment in Company 2 = 2$ Value of investment in Company 3 = 5$ Thus total value of the mutual fund portfolio = 5+2+5 = 12$. Now NAV (Net Asset Value) is calculated as NAV per Share = Current value of Fund Portfolio / Number of Fund Units = 12$ / 10 Shares = $ 1.2 Thus after one year, Value of As portfolio = NAV of each unit X Number of units held by A = 1.2 X 2 = 2.4 $ Similarly Value of Bs portfolio = 3.6 $ Value of Cs portfolio = 6 $ As you can see from the above example, the ABSOLUTE GAIN made by each investor in the mutual fund is proportional to the amount invested initially by him, but in terms of PERCENTAGE all three have gained 20% returns in one year. Note: NAV may not be a good indicator of a funds performance because it does not include the effect of dividends distributed by it every year. (In US, most mutual funds find it favorable to qualify as a Regulated Investment Company under the Internal Revenue Code. This helps them to pass on their incomes and gains to shareholders without having to pay taxes at fund level on dividend and capital gains from sell of securities. Thus double taxation is avoided and taxation applies only at shareholder level. To qualify as a 4

Regulated Investment Company, the fund must pay out minimum 90% of its gains and income during the tax year, to its shareholders.) Whenever a fund distributes a dividend to its shareholders, its NAV goes down by the same amount. Thus for someone not invested in the fund, the returns may appear lower, if only the NAV appreciation is considered and distributions are not included in the calculations. There's a lot of terminology associated with mutual funds that you'll need to know before you can start investing in them. These concepts are an important part of mutual fund investing; you should make sure that you understand them in full before you start to invest in mutual funds. Open-end Funds All mutual funds fall into one of two broad categories: open-end funds and closed-end funds. Most mutual funds are open-end. The reason why these funds are called "open-end" is because there is no limit to the number of new shares that they can issue. New and existing shareholders may add as much money to the fund as they want and the fund will simply issue new shares to them. Open-end funds also redeem, or buy back, shares from shareholders. In order to determine the value of a share in an open-end fund at any time, a number called the Net Asset Value (described below) is used. You purchase shares in open-end mutual funds from the mutual fund itself or one of its agents; they are not traded on exchanges. Closed-end Funds Closed-end funds behave more like stock than open-end funds; that is to say, closed-end funds issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange. Unlike open-end funds, closed-end funds are not obligated to issue new shares or redeem outstanding shares. The price of a share in a closed-end fund is determined entirely by market demand, so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). Since you must take into consideration not only the fund's net asset value but also the discount or premium at which the fund is trading, closed-end funds are considered to be more suitable for experienced investors. You can purchase shares in a closed-end fund through a broker, just as you would purchase a share of stock. Net Asset Value (NAV) Open-end mutual funds price their shares in terms of a Net Asset Value (NAV) (note that you can calculate NAV for a closed-end fund too, but it will not necessarily be the price at which you buy or sell closed-end shares). NAV is calculated by adding up the market value of all the fund's underlying securities, subtracting all of the fund's liabilities, and then dividing by the number of outstanding shares in the fund. The resulting NAV per share is the price at which shares in the fund are bought and sold (plus or minus any sales fees). Mutual funds only calculate their NAVs once per trading day, at the close of the trading session. How is a Mutual Funds Share Price Determined? During a lunch recently, Matt, a colleague, and I were discussing investments and the topic turned to mutual funds. I proceeded to tell him a few funds that I had in mind and why I liked them. The conversation then turned to how I choose mutual funds, primarily how to choose a good mutual fund manager whose strategy matches your goals. When it comes to this topic, there are a few mutual fund managers that I hold in high esteem and I began to talk about them. Matt then asked the question, well if everyone else thinks that this mutual fund manager is great, then wont the mutual fund price become inflated?. 5

For those with a strong background in mutual fund investing, this misconception is one that is easy to overlook when talking to others about mutual funds. Many investors assume that because mutual funds have a price per share, then their value is determined on the open market by investors who buy and sell shares. In the case of a certain type of mutual fund, this is the case. However, in most cases, investors need not worry that the price of a mutual fund they are buying has been pumped. Ive openly promoted certain mutual funds on this site, but in every case theyve been open ended funds (well discuss later). My promotion of these funds has no effect on the share prices of these funds. Lets take a look at why this may be. How Net Asset Value (NAV) Determines a Mutual Funds Share Price Net Asset Value (NAV) is the total value of all of a funds assets minus its liabilities divided by the number of outstanding shares for that fund. For instance, if a mutual fund has $100 million in assets and $10 million in liabilities, its net assets are $90 million. If this same mutual fund happens to have issued 9 million outstanding shares to investors, then its price per share (or NAV) is $10. Heres the formula: NAV = (assets liabilities)/shares outstanding The Difference Between Mutual Fund and Stock Share Prices Stock share prices Stock share prices are determined on the open market based on investors perceptions of the value of a share. Often times, these perceptions are based on a number of factors including the stocks current earnings per share, and expected future earnings per share. A number of macro and micro economic factors are taken into consideration, but the important thing to know is that a stocks share price is fluid and based on perceived value. If more people want to buy the stock than sell it, the share price trends upward. If more people want to sell the stock than buy it, it will trend downwards. Mutual fund share prices Mutual fund prices are based on the funds holdings rather than a perceived value of that fund. For instance, lets assume that a mutual fund owns a total of 10 different stocks, which wrapped up a trading session at $20 per share. For simplicity, lets say that this fund has zero liabilities and owns 2 shares of each stock. Meanwhile, the fund has sold a total of 10 shares. This fund would have a NAV of $40, heres how: NAV = ($20 x 10 stocks x 2 shares $0 liabilities)/10 shares = $40. The price of a share is not at all based on demand for that share. Fund Share Prices: The Law of Supply and Demand at Work The main reason why a stock share price can be influenced by outside factors and a mutual funds price cannot comes down to the law of supply and demand. At any given time, a company only has a certain limited number of shares available that are trading on the market. These shares are released during an initial public offering (IPO). Companies can later release more shares (secondary offerings), if theyd like, but it often has a large devaluing effect on the already existing shares. At the same time, mutual funds create as many shares as there are demand for, and sell and buy them back from you at the NAV price. They do not trade on the open markets, as stocks do. You typically get the price of the fund at the end of that trading session if you purchased before the closing bell, or at the end of the next trading session if you purchased after hours. In the case of mutual funds, unlimited supply equals an asset with a value that is not influenced by outside demand (or lack of). The Exception: Closed End Funds Prices There is one exception to everything weve discussed thus far, closed end funds. Everything mentioned in this article prior was in reference to open ended mutual funds, which make up the 6

vast majority of mutual funds out there. In contrast, a closed end fund is a certain type of mutual fund that has a limited number of shares that trade on the open market, much like a stock. Often times, these funds will trade at a discount to their NAV and investors will purchase them hoping to make a gain if the fund starts trading closer to its NAV. You may find it hard to believe that a closed end fund would trade at a discount to its NAV, but it does happen on a regular basis. In general, if you dont understand the reasons why these funds would sell at a discount to their NAV, youre probably better off steering clear of them and sticking with open ended funds. The term Net Asset Value (NAV) refers to the price per share of a mutual fund or the per-share value of an exchange-traded fund (ETF). The value is calculated by dividing the total net value of the securities by the number of shares in the fund. The net asset value functions in a similar way to a stock price in that it measures the value of a single share and can be used to compare fund performance against benchmarks. Net asset value is calculated at the close of market each day and is derived from the current market prices of the funds underlying securities. Calculating the Net Asset Value The net asset value of a mutual fund reflects the market value of all securities (e.g. stocks, bonds, cash) owned by the fund, less its total liabilities. That total is then divided by the number of shares outstanding, since NAV is typically issued on a per share basis. The net asset value, then, is the price per share of the fund. The formula for net asset value can be written as: NAV = Net Asset Value of the Fund / Number of Shares Outstanding Net Asset Value and Open-Ended Funds The majority of mutual funds are open-ended. An open-ended fund is a mutual fund in which shares are not traded between investors but issued to investors by the fund without restriction as to the amount it issues. The fund will buy back shares from investors when they decide to sell. The net asset value is important to open-ended fund investors because it is the price investors pay for new shares of the fund and the price for which they may redeem shares they hold. Conversely, closed-end mutual fund shares are traded at market prices, similar to stocks. These market prices might be at a premium or a discount to the net asset value. Shares of closed-end funds normally trade at a discount to the net asset value. Limitations of Net Asset Value for Investors While the net asset value provides a method to track price changes, it is not always a good indicator of the actual performance of the fund. Any time the fund pays a distribution to its shareholders, the net asset value decreases. This means that a decrease in the funds net asset value per share is not necessarily indicative of poor performance. Net Asset Value Calculation Follow these simple steps: 1. current market value of net assets = securities - liabilities = A 2. NAV = A / # outstanding shares

Explanation: In order to calculate the Net Asset Value of a fund, you need the current market value of its net assets. It is calculated by subtracting its liabilities from the fund's securities. After you have got this number all you have to do is to divide it by the number of outstanding shares. Example: The net assets of a fund are equal to $40 million. The fund holds 1 million shares. Therefore, NAV = $40 ($40 million / 1 million) Net Asset Value Application NAVs represent a good way to keep track of price changes of your mutual fund. But you should keep in mind that NAVs are not representative of the performance of the fund, since the NAV decreases every time the fund pays distributions to its shareholders. These are required by law; therefore there is no need for worry if you see a substantial drop in the price of your shares. This can be attributed to the distributions that have been paid to the shareholders, not to a bad performance of the fund. Since mutual funds are required by law to distribute at least 90% of their capital gains annually, you should expect a drop in the NAV at some time. Remember that Net Asset Values change daily! So, they are not a good performance indicator, since distributions and other factors obscure the exact state of your portfolio investment! As a result, your ability to track the activity of the mutual fund is hampered. ALL ABOUT MUTUAL FUND NAV - THE MAGIC NUMBER The Mutual Fund NAV or Net Asset Value is a key indicator of the market value of each share or unit of a mutual fund on a given day. It is the price per share or unit of the mutual fund. For example, if the NAV of a Templeton Mutual fund is quoted as $10, it means that an investor can buy a single share or unit of the templeton fund for $10. How is a Mutual Fund NAV Calculated? To calculate a Mutual Fund's Net Asset Value or NAV, the value of the total assets of the mutual fund is subtracted by its liabilities, and then this amount is divided by the total number of shares or units in the mutual fund. Mutual Fund NAV = Total Assets - Liabilities / Total number of shares or units The assets of a mutual fund would consist of its investments and cash. (For more info on mutual fund investments, read Getting to know Mutual Fund Basics). The liabilities of a mutual fund include operating expenses. For example, a mutual fund has assets in stocks and other investments to the value of $100, 000 and liabilities worth $20, 000. Assuming the mutual fund has issued 10, 000 shares, then its NAV would be: NAV = (100, 000 - 20, 000)/ 10, 000 NAV = 80, 000 / 10, 000 NAV = $8 The NAV or price per share of this mutual fund would be $8.

When is a Mutual Fund Calculated? A Mutual Fund NAV is calculated on a daily basis, after the stocks markets close for the day. This is because the value of the assets of a mutual fund, that is, its investments in stocks, changes constantly along with changes in the stock market. Its liabilities may change and so too the number of shares in the fund as in open-ended mutual funds. How is Mutual Fund NAV Different from Stock Prices? Mutual Fund NAV seems similar to stock prices as they are both indicative of the price per unit or share. Both funds and shares can be bought on the basis of the unit price. However, there are some differences between a mutual fund NAV and stock price:

The price of a stock is determined by company information - the performance of the company, public confidence in its services and other economic factors. The mutual fund NAV is a calculation of the fund assets divided by the number of total shares. Mutual fund NAV is calculated at the end of the day after the daily closure of stock markets. Therefore NAV changes only on a daily basis. Stock prices, however, change any time during the day during stock market trading hours.

It is important to note that the mutual fund NAV is linked to share prices, if the concerned mutual fund has invested in those shares in its fund portfolio. It can be seen that Mutual Fund NAVs are directly proportional to the value of its assets. If all other factors remain constant, and the share prices, in which the mutual fund has invested, depreciate, then the NAV of the mutual fund will also reduce. Where to Find Mutual Fund NAV Quotes? Mutual Fund NAVs are quoted in the fund literature including its websites, brochures and statements (electronic or print). They are also quoted in major newspapers and in business sites which monitor mutual funds. Some mutual funds also have helplines to give information regarding the daily NAV. How does a Mutual Fund NAV Fluctuate? A Mutual fund NAV changes value under these conditions: Rise or drop in value of stock investments. Change in number of shares in the mutual fund. Payout of dividends and capital gains by the mutual fund to its investors. Mutual Fund NAV after Dividend Payout A mutual fund pays out dividend to its investors who have opted for the dividend plan. In such cases, the NAV of the mutual fund falls according to the amount of dividend paid. For example, if the NAV of a mutual fund on 10 July 2010 was $10 and a per unit dividend of $2 is declared and paid out, then on 11 July 2010, the NAV of the mutual fund would fall to $8. The cash obtained by the investor can be reinvested to buy more shares of the mutual fund at lower value.

Some investors who seek pure capital appreciation may opt for an aggressive growth fund, without dividend payments. The returns then would be solely based on the mutual fund NAV appreciation. Mutual Fund Performance through NAVs While a stock's performance can be judged by its price in the stock market, the daily NAV is not necessarily the indicator of mutual fund performance. In order to gauge a mutual fund performance, the NAV should be monitored over a long term and annual returns of the mutual fund should be examined. Mutual Funds usually publish fund performance data in websites and brochures. These fund performance data include annual return data, computed using NAV on an annualised basis. This data reveals positive or negative percentage changes in the mutual fund performance. CALCULATION OF NAV What is NAV? Simply put, NAV is the sum total of all the assets (like stocks, Deposits, Corporate bonds, Treasury bills etc.,of the mutual fund (at market price) less the expenses (fund manager fees, audit fees, registration fees among others); divide this by the number of units and you arrive at the NAV per unit of the mutual fund. An illustration may help to understand better. NAV calculation : Net Assets = Rs 128,000 Expenses = Rs 3,000 No. of Units = 1,250 NAV = (128000-3000)/6000 = Rs.100 And depending on the market values of the assets on all market days, the NAV may rise or fall. A mutual fund's relative performance depends on the asset allocation, stock selection, buying & profit booking at appropriate timings.

Other points on NAV

The NAV of a mutual fund is calculated by the mutual fund house itself and in some cases by some accounting firms that the mutual fund might hire for this purpose. Usually, the calculation of a NAV is impossible during market hours as the price of the underlying holdings (say stocks) keeps changing. Though the NAV can be calculated, it would change the next minute or second. Given this, NAVs are usually declared after market closing hours once a day. As per the regulator SEBIs guidelines, all mutual funds are required to publish the NAV of their mutual fund schemes at least once a week and in two leading newspapers. Note that the NAV of a mutual fund is calculated after deduction of the Expense Ratio of a mutual fund. The expense ratio is the total amount of annual expenses incurred by a mutual fund and it includes the management fee and operating expenses like the registrar and transfer agent fee, marketing and distribution fee, audit fee and custodian fee.

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