16.3 Appraising a mutual fund
The performance of a mutual fund can be appraised from the Net Asset Value (NAV) which is disclosed on a daily basis. NAV on a particular date reflects the realizable value of each unit of the scheme if the scheme is liquidated on that date. In other words, NAV is like the book value of a company’s shares. Now, let’s see how NAV is calculated. NAV is calculated by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and by dividing number of units outstanding. Here’s an hypothetical example explaining how the NAV is calculated:
A mutual fund scheme mopped up Rs 12 lakh by selling 1.2 lakh units of Rs 10 each to unit holders. The money was invested in shares and other assets. After 1 year, if the market value of its assets is Rs 18 lakh, the NAV will be 18/1.2 = Rs 15. The higher the NAV, the better is the performance and market value (if it is a listed scheme) or repurchase price.