Mutual Fund Unlocked: NAV and Mutual Fund Costs

After understanding the Basics of Mutual Funds now its time to understand the basic costs involved in the mutual funds and the concept of net asset values.

Net Asset Value (NAV)

Net Asset Value (NAV) is the value of assets of each unit of the scheme. NAV is calculated everyday based on the closing prices of all securities held. NAV also considers interest, dividend and reduction of liabilities and expenses apart from market value of investments. Every mutual fund shall calculate the NAV of each scheme by dividing the net asset of the scheme by the number of units of that scheme outstanding on the date of valuation and publish the same at least in two daily newspapers at intervals not exceeding a week. However, the net asset value of any scheme for special target segment or any monthly scheme which are not compulsorily required to be listed in the stock exchange may publish the NAV at monthly or quarterly intervals as permitted by SEBI.

So, formula for the calculation of NAV is as follows

Costs incurred for operating mutual funds include advisory fees paid to investment managers, audit fees, trustee fees, transfer agent fees, custodial fees, agents commission etc. The break up of these expenses is given in the offer document. Operating expenses are calculated on an annualised basis, but are accrued on a daily basis. Therefore, an investor is charged expenses prorated for the time he has invested in the fund. With the help of operating expenses, expense ratio is calculated by dividing operating expenses by average net assets.

Sales Loads

These are otherwise called as sales loads and are charged directly to the investors. Mutual funds use the sales loads for payment of agent’s commission and expenses for distribution and marketing.

Exit Loads

These are the charges levied at the exit from the fund. There is no such fixed exit loads charged it varies from scheme to scheme. In the current practices according to the holding the funds could charge 0.5 to 3 percent as exit loads. However, if investor holds the investment over a specific time period no exit load would be charged to them.

Transaction Charges

These charges are applicable to the investment above Rs. 10,000 and would be paid to the intermediary who is selling the fund. The transaction charges of Rs. 100/- is charged for commitment of Rs. 10,000 through SIP and these charges are deducted over 4 instalments. (from 2nd installment to 5th). These are one-time charges which are applicable and paid at the time of investing the money.

To unlock more insights regarding mutual fund, Stay Tuned to Mutual Funds Unlocked.

Mutual Fund Unlocked: Basics of Mutual Funds (Part I)

Mutual Fund Unlocked: Basics of Mutual Funds (Part II)