How a mutual fund unit is priced, and how expenses and loads affect what an investor actually receives.
NAV (Net Asset Value) = (Total Assets - Total Liabilities) / Total Units Outstanding. It represents the value of one unit of the scheme at a given point in time.
Worked example: assets of Rs 500 crore, liabilities of Rs 5 crore, and 49.5 crore units outstanding gives NAV = (500 - 5) / 49.5 = Rs 10.
For an open-ended scheme, NAV is computed and published daily.
Interest income, dividends received, realised and unrealised capital gains, and appreciation in security prices all push NAV up; expenses, losses, and any dividend payouts to unitholders pull NAV down.
Fair valuation principles require the AMC to value the portfolio's securities at a realistic, realisable price - not a stale or distorted one - especially for thinly traded or unlisted securities where a simple last-traded-price approach could be misleading.
SEBI has laid down specific valuation methodologies for different security types to keep NAV as close to true economic value as possible.
TER = (Total Expenses / Average AUM) x 100, and it is charged on a graded slab basis that decreases as the scheme's AUM grows - larger funds are subject to progressively lower TER ceilings on the incremental slabs of assets, not one flat percentage across the whole AUM.
Worked example: expenses of Rs 2 crore on average AUM of Rs 100 crore gives TER = (2 / 100) x 100 = 2%.
Always check the current SEBI slab table for exact breakpoints rather than assuming a single flat percentage applies regardless of fund size.
Entry load has been permanently banned since 2009. Exit load, where applicable (commonly charged if units are redeemed within a specified holding period), is retained within the scheme itself - credited back to the fund's assets, not paid out to the AMC or the distributor.
Purchase and redemption requests are processed at the NAV applicable based on when the request is received relative to the scheme's cut-off time (commonly cited as 3:00 PM for equity schemes, earlier for liquid/overnight funds); specific cut-off rules can vary by scheme category.
Memory hook
NAV is the per-unit slice of the fund after liabilities; TER eats into that slice every year, on a sliding scale.
Independent study aid by Ramaniya, based on the syllabus of the National Institute of Securities Markets (NISM) - not an official NISM publication.
