Net asset value represents difference between the current market value of all the holdings (stocks, bonds etc.) including the cash and all the liabilities including all the redemption requests. The NAV is usually expressed as per share or unit amount and calculated by dividing the total net asset value by the number of total units.
It is the Mutual Fund Management Company’s responsibility to calculate the NAV properly and publish the value every day.
Let us see an example about how the NAV is calculated
Suppose a fund management company issued one mutual fund scheme with NAV as Rs. 10 on 1st January 2010.
At that time total number of investors invested in that mutual fund is 200 with the average investment of Rs. 100, resulting in total investment of Rs 20,000.
So at the time of issuing the mutual fund the total number of units was 20,000/10 = 2000.
Suppose after 6 months on 1st July 2010, the total net asset value (NAV) was increased to Rs 24,000. So the NAV of each unit was 24,000/2000 = Rs 12 on 1st July 2010.
One investor invested Rs 300 in that mutual fund on 1st July at NAV of Rs 12. He has received 300/12 = 25 units. After the transaction the total net asset value became Rs 24,300 and total units became 2025.
Suppose after another 2 months on 1st September 2010, the total NPV fell to Rs 23000 because of sharp drop in the share market. So at that time the NAV was 23000/2025 = Rs 11.36.
On 1st September 2010, the initial investors invested at Rs 10 NAV were at profit and the other investor invested on 1st July at NAV of 12 was at loss.
On the same day, one investor sold his units worth of Rs 500. The number of units sold by him was 500/11.36 = 44 units.
So after the selling the total units was 2025-44 = 1981 with total NAV was Rs 22500 (almost same as 11.36* 1981).
This is how the NAV is calculated for each unit price and trading is performed on the same. Here fraction of units is used unlike the share transactions which can only be in digits.