(1) Net Asset Value (NAV): It is the amount which a unit holder would receive if the mutual fund were wound up. An investor in mutual fund is a part owner of all its assets and liabilities. Returns to the investor are determined by the interplay of two elements Net Asset Value and Costs of Mutual Fund. Net Asset Value is the mutual fund’s calling card. It is the basis for assessing the return that an investor has earned. There are three aspects which need to be highlighted:
(i) It is the net value of all assets less liabilities. NAV represents the market value of total assets of the Fund less total liabilities attributable to those assets.
(ii) NAV changes daily. The value of assets and liabilities changes daily. NAV today will not be NAV tomorrow or day later.
(iii) NAV is computed as a value per unit of holding.
Asset Values: Valuation Rule
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Nature of Asset
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Valuation Rule
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|
Liquid Assets e.g. cash held
|
As per books.
|
|
All listed and traded
securities
(other than those held as not for sale)
|
Closing Market Price
|
|
Debentures and Bonds
|
Closing traded price or yield
|
|
Illiquid shares or debentures
|
Last available price or book
value whichever is
lower.
Estimated Market Price approach to be adopted if suitable benchmark is
available.
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|
Fixed Income Securities
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Current Yield.
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Netting the Asset Values
The asset values obtained from above have to be adjusted as follows :
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Additions
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Deductions for Liabilities
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Dividends and Interest accrued
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Expenses accrued
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Other receivables considered good
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Liabilities towards unpaid assets
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|
Other assets (owned assets)
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Other short term or long term liabilities
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Computation of NAV
Net Asset Value (NAV): It is value of net assets of the funds. The investor’s subscription is treated as the unit capital in the balance sheet of the fund and the investments on their behalf are treated as assets. The funds net assets are defined as the assets less liabilities.
NAV = Net asset of the scheme Number of units outs tanding
where net assets of the scheme is defined as below -
Net Assets of the Scheme = Market value of investments + Receivables + Other accrued income + other assets - Accrued Expenses - Other Payables - Other Liabilities
Illustration 1
Based on the following data, determine the NAV of a Regular Income Scheme
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|
`
(in lakhs)
|
|
Listed Shares at cost (ex-dividend)
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20.00
|
|
Cash in hand
|
1.23
|
|
Bonds and Debentures at cost
|
4.30
|
|
Of these, Bonds not listed and quoted
|
1.00
|
|
Other fixed interest securities at cost
|
4.50
|
|
Dividend accrued
|
0.80
|
|
Amounts payable on shares
|
6.32
|
|
Expenditure accrued
|
0.75
|
|
Number of Units (` 10 F.V. each)
|
2,40,000
|
|
Current realizable value of
fixed income securities of F.V. of ` 100
|
106.50
|
All the listed shares were purchased at a time when index was 1200. On NAV date, the index is ruling at 2120. Listed bonds and debentures carry a market value of ` 5 (lakhs) on NAV date.
Solution
|
Particulars of
assets at cost (or liabilities)
|
Adjustment
|
Value
( In lakhs)
|
|
Equity shares
|
Index (2120/1200)
× 20
|
35.33
|
|
Cash in hand
|
Book Value
|
1.23
|
|
Bonds and Debentures not listed
|
Book Value
|
1.00
|
|
Bonds and Debentures listed
|
Market Value
|
5.00
|
|
Dividends accrued
|
|
0.80
|
|
Fixed Income Securities
|
MV (106.50/100
× 4.50)
|
4.7925
|
|
Sub Total Assets (A)
|
|
48.1525
|
|
Less : Liabilities
Due on shares
|
|
6.32
|
|
Expenses Payable
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Accrual Basis
|
0.75
|
|
Sub Total Liabilities (B)
|
|
7.07
|
|
Net Asset Value (A) – (B)
|
|
41.0825
|
|
Units under the scheme
|
Number
|
2,40,000
|
|
Net Asset Value
|
Per Unit
|
` 17.12
|
(1) Costs incurred by Mutual Fund: Costs when high reduce the returns of an investor. High Costs are the cause of below par performance of some mutual funds. Costs carry two components:
(1) Initial Expenses attributable to establishing a scheme under a Fund and (2) Ongoing recurring expenses (Management Expense Ratio) which is made up of (a) Cost of employing technically sound investment analysts (b) Administrative Costs (c) Advertisement Costs involving promotion and maintenance of Scheme funds. The Management Expense Ratio is measured as a % of average value of assets during the relevant period.
Expense Ratio = Expense / Average value of Portfolio
If Expenses are expressed per unit, then Expense Ratio = Expenses incurred per unit / Average Net Value of Assets.
The Expense Ratio relates to the extent of assets used to run the Mutual Fund. It is inclusive of travel cost, management consultancy and advisory fees. It however excludes brokerage expenses for trading as purchase is recorded with brokerage while sales are recorded without brokerage.
(3) Computations of Returns: Investors derive three types of income from owning mutual fund units
1. Cash Dividend
2. Capital Gains Disbursements
3. Changes in the fund’s NAV per unit (Unrealised Capital Gains)
For an investor who holds a mutual fund for one year, the one-year holding period return is given
by
Return = Dividend + Realised Capital Gains + Unrealised Capital Gains/Base Net Asset Value
= D1 + CG1 + (NAV1 – NAV0) / NAV 0 × 100
Where D1 → Dividend, CG1 → Realised Capital Gains, NAV1 – NAV0 → Unrealised Capital Gains, NAV0 → Base Net Asset Value.
Illustration 2
A mutual fund, that had a net asset value of ` 10 at the beginning of the month, made income and capital gain distribution of ` 0.05 and ` 0.04 per unit respectively during the month and then ended the month with a net asset value of ` 10.03. Compute the monthly return.
Solution
Given D1 = 0.05, CG1 = 0.04, Unrealised Capital Gains = NAV1 – NAV0 = ` 10.03 – ` 10.00 = ` 0.03. Monthly Return = (0.05 + 0.04 + 0.03) / 10 × 100 = 1.2%.
Illustration 3
A mutual fund’s opening NAV is ` 20 and its closing NAV is ` 24. If the expense per unit is ` 0.50, what is the expense ratio?
Solution
Expense Ratio = (Expense incurred per unit / Average NAV)
= 0.50 / (20+24) / 2 = 2.27
Illustration 4
A mutual fund raised ` 150 lakhs on April 1, by issue of 15 lakh units at ` 10 per unit. The fund invested in several capital market instruments to build a portfolio of ` 140 lakhs. Initial expense amounted to ` 8 lakhs. During the month of April, the fund sold certain securities costing ` 44.75 lakhs for ` 47 lakhs and purchased certain other securities for ` 41.6 lakhs. The fund management expenses for the month amounted to ` 6 lakhs of which ` 50,000 was in arrears. The dividend earned was ` 1.5 lakhs. 80% of the realized earnings were distributed. The market value of the portfolio on 30th April was ` 147.85 lakhs.
An investor subscribed to 1 unit on April 1 and disposed it off at closing NAV on 30th April. Determine his annual rate of earning.
Solution
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|
Amount in
` lakhs
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Amount in
` lakhs
|
Amount in
` lakhs
|
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Opening Bank (150-140-8)
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2.00
|
|
|
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Add: Proceeds from sale of securities
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47.00
|
|
|
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Add: Dividend received
|
1.50
|
50.50
|
|
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Deduct: Cost of securities purchased
|
41.60
|
|
|
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Fund management expenses paid (6.0 - 0.5)
|
5.50
|
|
|
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Capital gains distributed = 80% of (47.00
– 44.75)
|
1.80
|
|
|
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Dividend distributed =80% of 1.5
|
1.20
|
50.10
|
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Closing Bank
|
|
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0.40
|
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Closing market value of portfolio
|
|
|
147.85
|
|
|
|
|
148.25
|
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Less: Arrears of expenses
|
|
|
0.50
|
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Closing
Net Assets Number of units (Lakhs)
Closing NAV per unit
|
|
|
147.75
15.00
9.85
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Rate of Earning
|
|
Amount
|
|
Income received (1.8+1.2)/15
|
0.20
|
|
Loss: Loss on disposal (10-9.85)
|
0.15
|
|
Net earning
|
0.05
|
|
Initial investment
|
10.00
|
|
Rate of earning (monthly)
|
0.5%
|
|
Rate of earning (Annual)
|
6%
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(3) Holding Period Return (HPR): A simple but effective measure of performance is to describe mutual fund return in terms of the following three major sources:
(a) Dividend Earned
(b) Capital Gain Distribution/ Earned
(a) Change in price or NAV.
In case investment is held for a period less than one year, then pay offs can be easily converted into returns by using Holding Period Return (HPR) formula, which is as follows:
HPR = (NAV1 - NAV0 ) + Capital Gain Distribution/ Earned+ Dividend/Regular Income Received
NAV0
Illustration 5
A mutual fund that had a net asset value of ` 20 at the beginning of month - made income and capital gain distribution of Re. 0.0375 and Re. 0.03 per share respectively during the month, and then ended the month with a net asset value of ` 20.06. Calculate monthly return.
Solution
Calculation of monthly return on the mutual funds:
r = é(NAVt - NAV t- 1) + It + Gt ù
ê
ë
Where,
NAV
ú
1 û
r = Return on the mutual fund
NAVt = Net assets value at time period t NAVt – 1 = Net assets value at time period t – 1 It = Income at time period t
Gt = Capital gain distribution at time period t
= é(` 20.06- ` 20.00 ) + (` 0.0375 + ` 0.03) ù
ê 20 ú
ë û
= 0.06 + 0.0675
20
= 0.1275 = 0.006375
20
or r = 0.6375% p.m. or say = 7.65% p.a.
However in most of the cases it has been found that the dividend and capital gains are reinvested, in such cases question arises as to how to obtain a measure of return when investor receives his/her (dividend and capital gains) payouts in form of additional shares or units than cash. In such a case the formula for the calculating the HPR discussed above shall be slightly modified with only difference that to keep a track of number of units acquired through reinvestment. We can use the
following formula for calculating the HPR in such case.
(No. of units at end of Period x Ending Price) - (No. of units at begining of Period x Initial Price) No. of units at begining of Period x Initial Price
Illustration 6
Mr. X, an investor purchased 200 units of ABC Mutual Fund at rate of ` 8.50 p.u., one year ago. Over the year Mr. X received ` 0.90 as dividend and had received a capital gains distribution of `
0.75 per unit.
You are required to find out:
(a) Mr. X’s holding period return assuming that this no load fund has a NAV of ` 9.10 as on today.
(b) Mr. X’s holding period return, assuming all the dividends and capital gains distributions are reinvested into additional units as at average price of ` 8.75 per unit.
Solution
(a) Return for the year (all changes on a per unit basis): Change in Price (` 9.10 - ` 8.50) ` 0.60
Dividends received ` 0.90
Capital gains distributions ` 0.75
Total return ` 2.25
Holding period return = ` 2.25
` 8.50
= 26.47%
(b) When all dividends and capital gains distributions are reinvested into additional units of the fund (` 8.75/unit):
Dividends and capital gains per unit: ` 0.90 + ` 0.75 = ` 1.65 Total amount received from 200 units: ` 1.65 X 200 = ` 330.00 Additional units added: ` 330/` 8.75 = 37.71 units Value of 237.7 units held at end of year: 237.71 units X ` 9.10 = ` 2,163 Price paid for 200 units at beginning of year 200 units X ` 8.50 = ` 1,700
Thus, the Holding Period Return would be:
= (No. of units at end of Period x Ending Price) - (No. of units at begining of Period x Initial Price) No. of units at begining of Period x Initial Price
H.P.R. =
` 2,163 - ` 1,700 =
` 1,700
` 463
` 1,700
= 27.24%
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