Formula to calculate NAV for growth and dividend plan are exactly the same. The only difference is that in case of the dividend plan, the total dividend is deducted from the NAV of the Growth Plan. For example, assume that at the end of the first, the NAV of an equity fund’s growth plan and dividend plan is at Rs.108. At the end of the first year, the dividend plan declares a dividend of Rs.3 per unit. Post this dividend declaration, the NAV of the growth plan will remain at Rs.108 but the NAV of the dividend plan reduces to Rs.105 as Rs.3 is paid out as dividends. However, it must be remembered that although the dividend declared is Rs.3 and the NAV reduces by Rs.3, the investor will get less than Rs.3 because there is dividend distribution tax (DDT) that is levied at 10% on equity fund dividends. Let us now turn to the concept of NAV and then to the calculation of the NAV.
What exactly is the NAV of a mutual fund?
Net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. The NAV of the fund is like the price of a stock but there is a difference. The NAV is based on the value of all the investments held by the fund while the stock price is based on the future growth potential of the stock. NAV represents the per share/unit price of the fund on a specific date or time. NAV is important because this is the price at which the open ended funds are purchased and redeemed. Of course, you don’t redeem exactly at the NAV due to a variety of factors. For example, exit loads for early redemption and securities transaction tax (STT) ensure that your redemption price is lower than NAV. But NAV is the benchmark on which fresh investments and redemptions are done.
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How is Net Asset Value (NAV) of a fund actually calculated?
The NAV is the net asset value of the fund, which is the asset value adjusted for the outstanding liabilities and payables. The question is how these expenses are charged to the fund as some are regular and some are periodic. For that, the funds use the concept of Total Expense Ratio (TER), which is a sum of all relevant costs and expressed as a percentage of the AUM on an annualized basis. This annualized cost is proportionately billed to the NAV and the daily NAV is reflected net of this TER to properly allocate costs.
In short, if the AUM of the fund is Rs.2000 crore and the TER is 2.3% then the total allocable expenses annually will be Rs.46 crore. This will be defrayed on a daily basis across 250 trading days on which NAV is declared. Effectively, the cost of Rs.18.40 lakhs will billed to the NAV on a daily basis on a per unit basis before the NAV is declared.
NAV = (Assets – Liabilities) / Total number of outstanding MF units
Live illustration of NAV calculation
Assume that a mutual fund has Rs.100 million worth of total investments based on the day’s closing prices. It also has Rs.7 million of cash and cash equivalents on hand, as well Rs.4 million in total receivables. Accrued income for the day is Rs.75,000. The fund has Rs.13 million in short-term liabilities and Rs.2 million in long-term liabilities. Accrued expenses for the day are Rs.10,000. The fund has 5 million units outstanding.
NAV = (Assets – Liabilities) / Total number of outstanding shares
NAV = [(100,000,000 + 7,000,000 + 4,000,000 + 75,000) – (13,000,000 + 2,000,000 + 10,000)] / 5,000,000
= (111,075,000 – 15,010,000) / 5,000,000 = Rs.19.21
This is the NAV for the growth plan. To this if you deduct the dividend declared, that becomes the NAV for the dividend plan.