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  #1  
Old 31st July 2012, 06:59 PM
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Default What is Net Asset Value of a Mutual Fund?



What is Net Asset Value of a Mutual Fund? Looking for a simple and basic answer!
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  #2  
Old 31st July 2012, 09:47 PM
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I had written this article for another site in 2007.

NAV Calculations

The Net Asset Value is the fund’s 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 A’s portfolio = NAV of each unit X Number of units held by A = 1.2 X 2 = 2.4 $

Similarly

Value of B’s portfolio = 3.6 $
Value of C’s portfolio = 6 $

As we 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 fund’s 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 “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.
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Old 31st July 2012, 10:37 PM
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Quote:
Originally Posted by Alchemist View Post
After one year

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
$1.2 minus expense ratio, right?

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Originally Posted by Alchemist View Post
Note: NAV may not be a good indicator of a fund’s performance because it does not include the effect of dividends distributed by it every year.
Not in the case of the growth option, right?
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Old 1st August 2012, 06:59 AM
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Quote:
Originally Posted by vaduvur View Post
$1.2 minus expense ratio, right?

Not in the case of the growth option, right?
Right and right.

Recurring expenses are charged on daily basis and they reduce the value of portfolio.

Quote:
Operating expenses are calculated on an annualized basis and are normally accrued on a daily basis and the NAV so computed is shown after deducting these Recurring Expenses.
Mutual Fund Fees and Charges

In case of growth funds, dividend distributed = 0 and for such funds NAV movement reflects the actual performance of the fund.
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  #5  
Old 4th October 2012, 07:54 PM
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Couple of questions.

1) Does 'Dividend Reinvest' option ever make sense over the growth option? I am asking because I assume dividend would be taxed before reinvesting or does that not happen?

2) Let's I sell my MF today online through ICICIDirect - what price would I get? Yesterday's NAV or EOD NAV of today?
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  #6  
Old 5th October 2012, 07:20 AM
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Quote:
Originally Posted by vinvest View Post
2) Let's I sell my MF today online through ICICIDirect - what price would I get? Yesterday's NAV or EOD NAV of today?
EOD NAV of today.

Also I think upto 3 PM IST it would be EOD NAV of today and after that EOD NAV of tomorrow.
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Old 5th October 2012, 07:56 AM
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Quote:
Originally Posted by vinvest View Post
1) Does 'Dividend Reinvest' option ever make sense over the growth option?
I've also been looking for an answer to this Q. We'd need to compare the growth charts of the Div Reinvest option vs Growth of the fund, to see what the divergence is.

Quote:
Originally Posted by vinvest View Post
1)I am asking because I assume dividend would be taxed before reinvesting or does that not happen?
If it's true that Div reinvest options attract tax on the dividend, then its suitability would depend on (a) the extent of debt component of the fund in question; dividends from funds that are more than 65% in equities are tax free, I think and (b) the tax slab of the investor: 30% bracketwallas might be better off with the Growth option.
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Old 5th October 2012, 07:57 AM
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Quote:
Originally Posted by paran View Post
EOD NAV of today.

Also I think upto 3PM IST it would be EOD NAV of today and after that EOD NAV of tomorrow.
So at the time of giving the sell order, one wouldn't know what price it's being sold at. I have seen MFs NAV fluctuating upto around 3% on some days. That's a lot of variation.
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Old 5th October 2012, 09:08 AM
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Quote:
Originally Posted by vinvest View Post
So at the time of giving the sell order, one wouldn't know what price it's being sold at.
Yes we don't know at what price we would be selling our units.


Quote:
Originally Posted by vinvest View Post
I have seen MFs NAV fluctuating upto around 3% on some days.
NAV is known at the end of the day only. How did you notice the fluctuation?
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Old 5th October 2012, 04:47 PM
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Quote:
Originally Posted by paran View Post

NAV is known at the end of the day only. How did you notice the fluctuation?

I meant - one day to next day, MF NAV changed as much as 3%. So not knowing the price while selling is not a good thing.
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Old 5th October 2012, 09:40 PM
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Quote:
Originally Posted by vinvest View Post
Couple of questions.

1) Does 'Dividend Reinvest' option ever make sense over the growth option? I am asking because I assume dividend would be taxed before reinvesting or does that not happen?
Refer this. DDT (dividend distribution tax) is paid by the fund house and hence this is not taxed again at the hands of investor.

In case of dividends, instead of cash dividends being issued to the investor ( as in the dividend payout plan ) equivalent units based on closing NAV are issued to the investor. This is reflected in the NAV of the dividend option of the fund.

For an investor in equity funds, dividend reinvest can have additional benefits particularly in case of ELSS funds, where the existing investment by virtue of dividend re-invest gets additional tax rebate.

Quote:
Originally Posted by vinvest View Post
2) Let's I sell my MF today online through ICICIDirect - what price would I get? Yesterday's NAV or EOD NAV of today?
Sell before 3 pm gets todays NAV computed at EOD and after 3 pm gets NAV of next business day. There is no provision to get yesterday's NAV.
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