Understanding mutual fund NAVs

Net Asset Value or NAV is a very important term in the lexicon of mutual funds. NAV is the market value or price of one unit of a mutual fund scheme. It is the per unit price you pay or get when you are buying or selling (redeeming) mutual funds. You should know the correct NAVs of your mutual fund schemes when you are filing your Income Tax Returns for calculating capital gains tax. It is also important to know the applicable NAVs when you are investing in mutual funds or redeeming mutual funds.

How is NAV calculated?

The NAV is calculated by dividing the market value of net assets of the mutual fund scheme by the total number of units outstanding. The asset of a mutual fund scheme is the market value of the securities and the cash in the scheme portfolio. Net asset value is the value of scheme assets minus the expenses (TER) and liabilities. NAVs are calculated based on the closing prices of the scheme portfolio securities at the end of each business day and disclosed by the Asset Management Company (AMC) on a daily basis.

How are units allotted?

When you invest a certain amount in a mutual fund scheme, the number of units allotted to you will depend on the scheme NAV on the day when the transaction takes place or the NAV of the subsequent business day depending on when the subscription request was accepted and / or when funds were debited from your bank account to AMC’s account. Similarly, if you sell your mutual fund units, the sale or redemption value will depend on the NAV of the scheme on the day, when the transaction takes place or the NAV of the subsequent business day depending on when the redemption request was accepted.

NAV cut-off times

It is important to know the NAV cut off times when you are investing in mutual funds. The NAV cut off time of all mutual funds, except overnight and liquid funds is 3 PM. If your investment application is received by the AMC or Registrar and Transfer Agency (RTA) before 3 PM and funds in your bank account are also debited before 3 PM, then units will be allotted based on the NAV of the same business day. If your application is received after 3 PM or funds are available only after 3 PM, then the NAV of subsequent day will apply. For overnight and liquid funds the NAV cut-off time is 1:30 PM. The NAV cut off time of 3 PM is also applicable for redemption transactions for all mutual funds, including overnight and liquid funds. The investment and redemption cut off times are applicable for types of transactions e.g. SIP, STP, switches (switch-in / switch-out), SWP etc.

Calculating capital gains

You should know that the incidence of capital gains occurs only if you redeem or sell mutual fund units. Capital gains = (Redemption NAV – Purchase NAV) X number of units sold. Short term or long term capital gains tax will apply on the above capital gains depending upon your investment holding period and whether the mutual fund scheme was an equity scheme or non equity scheme. We will not go into the details of capital gains taxation in the post, but it is important that you use the correct NAVs of your mutual fund schemes while calculation capital gains.

Know the correct NAV of your mutual funds

There are two types of mutual fund investment plans – Direct and Regular. The NAVs of Direct and Regular Plans are different. Mutual fund schemes also have different profit distribution options – Growth and IDCW. The NAVs of Growth and IDCW options are different. You should use the correct NAVs for calculating capital gains. For example, if you have invested in Direct Plan / Growth Option, then do not use NAVs of Regular Plan / IDCW Option for calculating capital gains, because you will be understating your gains.

The NAVs of your mutual fund transactions are available in your mutual fund account statement provided by the AMC.

Where can I find mutual fund NAV history?

If you do not know the purchase or redemption NAVs of your mutual fund holdings, do not worry. You can getthe current mutual fund NAVs as well as historical NAVsof all schemes in AMC, RTA and AMFI portals or you can simply call the account statement from the fund house.

Additional points to note about MF NAV

• If you redeem within the exit load period (as specified in the Scheme Information Document), the exit load will be deducted from your redemption NAV based on the exit load structure of the scheme.


• You should know that TERs are included in the scheme NAVs; you do not have to adjust for TERs separately, to calculate scheme returns.


• ETF transactions in stock exchanges do not take place on the basis of NAVs. ETF transactions take place on the bid / ask prices at the time of the transaction. You should use NAVs as reference point when you are buying or selling ETF units, to see how much higher / lower are the bid / asking price compared to the NAV. For actively traded or highly liquid ETFs, the market prices (bid / ask) should not be too high / low compared to the actual NAVs.


• You should understand that NAV cut-off times are applicable for receipt of transaction requests by the AMC or RTA, and not when you provided your transaction request to your mutual fund distributor. For example for a redemption transaction, if you submitted your request to your mutual fund distributor before 3 PM, but the distributor submitted your request to the RTA / AMC after 3 PM, the NAV of the subsequent business day will apply. You should work with your mutual fund distributor to ensure that your transaction requests are accepted at the right time by the RTA / AMC

Summary

In this blog post we discussed about mutual fund NAVs and why they are important when you are making mutual fund transactions and for tax filing purposes. If you have more questions on NAVs, then please ask them in our comments section. You can also discuss your queries with your mutual fund distributor.