Normally investors confuse NAV as something like a share price. NAV of Mutual Fund and price per share are two very different things. NAV or Net Asset Value is essentially ‘book value’ of a mutual fund. It is significantly different from a company’s share price. The price quoted on the stock exchange of a company often differs from its book value. The price of a share incorporates the outlook of the company’s future prospects, existing demand-supply of that share and several other objective and subjective parameters. Whereas, NAV of a mutual fund is the sum total of the market value of all the shares held in the portfolio including cash (fewer liabilities if any) and divided by the total number of units outstanding. It is essentially the price at which a unit of a mutual fund is bought or sold. As there is no concept of market value for the mutual fund so when we buy mutual funds we buy it in terms of NAV and that is the book value.
Before understanding how NAV of mutual funds is calculated, one ought to know that mutual fund assets consist of two components - Securities and Cash. Securities are bonds and/or stocks or both. Therefore, the total asset value of a fund will consist of its cash, bonds, and stocks. While total assets would include - dividends, interests accrued and the liquid assets. Again, debt consists of both liabilities such as money owed to the creditors and expenses accrued.
Now, the net asset value formula of mutual fund calculation is:
Net Asset Value (NAV) = (Assets - Debts) \ (Number of Outstanding Units)
Herein, Assets stand for the market value of mutual fund investments + Receivables + Accrued Income.
Debts stand for Liabilities + Expenses (accrued).
The market value of stocks and debentures is often the closing price on the stock exchange where they are listed.
As per SEBI regulations & guidelines, all Mutual Funds are required to publish their NAV on every business day.
One more important thing, NAV is obtained after deducting the expense ratio of a fund. Whereas expense ratio represents the total of all expenses made by a mutual fund annually, covering the operational expenses, management fees, marketing and distribution fees, transfer agent fees, custodian fees and audit fees.
As has been said, NAV or Net Asset Value is the price of each unit of a mutual fund. On the commencement of New Fund Offer (NFO), a mutual fund scheme is introduced, and it is priced at face value - ₹10. Later it may fluctuate to the downside or upside depending on the performance of the fund. Now, suppose a situation where a man named Shiv is investing ₹100,000 as a lump sum during the NFO period. Now, he will get 10000 units (₹100,000/₹10) thus each having mutual funds NAV of ₹10.