8.2 Computation of Net Assets of a Scheme and NAV

The Computation

Net Assets = Market value of investments
           + Receivables
           + Accrued income
           + Other current assets
           - Liabilities
           - Accrued expenses

NAV per unit = Net Assets / Number of units outstanding

Every component matters, and questions are built by omitting one.

Market value of investments — every holding at fair value on the valuation day.

Receivables — amounts due to the scheme: sales of securities awaiting settlement, dividends declared but not received, interest due.

Accrued income — interest earned but not yet due. A bond paying half-yearly interest accrues daily, so the scheme recognises a proportionate amount each day. This is why a debt fund's NAV rises slightly on a day when prices are flat: accrual is running.

Liabilities — purchases of securities awaiting settlement, redemption payouts due, borrowings.

Accrued expenses — management fees, trustee fees, custodian and RTA charges, audit fees and other recurring expenses, accrued daily.

Worked Example

A scheme on a given valuation day:

Assets      = 1,240.00 + 46.00 + 3.50 + 0.80 = 1,290.30
Liabilities = 21.00 + 6.30 + 2.00           =    29.30
Net assets  = 1,290.30 - 29.30              = 1,261.00 crore

With 28 crore units outstanding:

NAV = 1,261.00 / 28 = INR 45.0357 per unit

Expenses Accrue Daily

The expense ratio is not deducted annually or charged separately. It is accrued every day as a proportionate fraction and subtracted before NAV is struck.

Illustration. A scheme with net assets of INR 1,261 crore and a total expense ratio of 1.60% per annum accrues, on a 365-day basis:

Daily accrual = 1,261 crore x 1.60% / 365 = approx INR 0.055 crore per day

The consequence stated plainly: the NAV an investor sees is already net of all recurring expenses. Returns computed from NAV are therefore net returns, and there is no separate expense deduction to allow for afterwards. A distributor who tells an investor that expenses will be deducted from their returns "at the end of the year" is describing something that does not happen.

Why Direct and Regular Plans Have Different NAVs

A scheme's direct and regular plans hold exactly the same portfolio. They differ only in expense ratio, because the regular plan carries distribution commission and the direct plan does not.

Since expenses accrue daily and reduce net assets, the two plans' NAVs diverge steadily over time:

Over a long holding period, an expense difference of 0.7 percentage points a year compounds into a material gap. This is arithmetic, not opinion, and a distributor should be able to state it accurately while explaining what the regular plan's cost purchases.

Rounding and Publication

The finer rounding for liquid and debt schemes exists because their daily movements are small — a two-decimal NAV would round away a meaningful part of a liquid fund's daily return.

What Does Not Change NAV per Unit

A frequent source of confusion: subscriptions and redemptions do not change NAV per unit. When an investor buys, both net assets and units rise proportionately; when an investor redeems, both fall proportionately. NAV per unit moves only because the value of the portfolio changes, income accrues, expenses accrue, or a distribution is paid.

Reconciling a Day's NAV Movement

When an investor asks why NAV moved, the change decomposes into a small number of components:

Change in NAV = market value movement of holdings
              + income accrued for the day
              - expenses accrued for the day
              - any distribution paid on that date

For an equity scheme, the first term dominates and the others are rounding. For a liquid scheme, the first term is negligible and the second dominates, which is why a liquid fund's NAV rises by a small, steady amount almost every business day.

This decomposition answers the two most common queries directly. A debt fund NAV that fell on a day when nothing traded moved because valuation agency prices changed. A NAV that dropped sharply on a specific date with no market fall almost certainly reflects a distribution on that record date.

Why NAV Is Computed Only Once a Day

Unlike a share price, NAV is not continuous. It is struck once, after market close, from the day's closing prices. There is no intraday NAV for an open-ended scheme, and an investor cannot transact at a price observed during the day.

This is what makes cut-off timings necessary. Without them, an investor could watch the market rise through the afternoon and subscribe at a NAV computed before that rise, at the expense of existing unitholders. The single daily NAV and the cut-off rules covered in section 10.8 work as a pair.

Exchange traded funds are the exception in appearance only. An ETF trades continuously at a market price on the exchange, and that price may differ slightly from NAV. The scheme still computes one NAV per day; the exchange price is what other investors are willing to pay, and arbitrage by authorised participants keeps the two close.

Business Days and Non-Business Days

NAV is computed on every business day. On holidays and weekends there is no NAV, and transactions received are processed against the next business day's NAV subject to the usual realisation rules. A scheme with substantial overseas holdings may face days when the Indian market is open and the foreign market is not, which the valuation policy addresses through prescribed treatment of stale prices.