How to calculate Mutual Fund price

The most common method for determining a mutual fund's price is as a percentage of its NAV.
Mutual Fund Pricing
3 min
02-May-2024

In India, mutual fund pricing is calculated with the help of the fund’s Net Asset value (NAV). If you are selling a mutual fund scheme, the closing NAV value of that trading day is considered.

The AMCs (Asset Management Companies) in India primarily offer two types of mutual fund schemes:

  • Growth: The profits are reinvested in these mutual fund schemes.
  • IDCW (Income distribution cum capital withdrawal): The profits are redistributed among the unit holders from time to time.

Also read about: IDCW vs Growth in Mutual Funds

NAVs of the Income Distribution Cum Capital Withdrawal (IDCW) falls to the extent of divided amount and applicable taxes.

Certain costs such as management fees, operational expenses, and expense ratios are deducted from the NAV on a daily basis. Only after accounting for expenses, the value of the fund's assets are reflected by the Net Asset Value of the mutual funds.

Mutual funds in India are regulated by the securities watchdog, SEBI (Securities and Exchange Board of India). This organisation carries out the following tasks:

  • All mutual fund pricing guidelines
  • MF disclosures
  • Norms of valuation

SEBI ensures that the mutual fund industry follows transparency and investor protection in Mutual Fund pricing.

What is a Net Asset Value (NAV)?

The full form of NAV is Net Asset Value. In the world of finance, especially in the mutual fund industry, NAV is an important metric. The formula of NAV calculation is given below:

NAV = (Assets - Liabilities) / (Number of shares)

To represent it in words, the net asset value of a mutual fund scheme is equal to the per-share market value of a fund's assets minus its liabilities. If you want to calculate the NAV of an MF scheme, you should divide the total value of assets of the fund (which includes stocks, bonds, cash, and other securities) by the total number of outstanding shares.

How are mutual fund prices determined?

The Net Asset Value of a mutual fund scheme indicates the performance of a fund. So, the investors use NAV value to assess the value of their investments. As the market value of the underlying assets changes, the NAV also changes. It fluctuates daily.

In India, investors buy/sell mutual fund shares at NAV price. This ensures that a pricing mechanism is implemented that is both fair and transparent. NAV is essential for both fund managers and investors as they use it for various financial calculations.

Why does the NAV value change?

The underlying assets of mutual funds are stocks. The value of stocks changes throughout a trading day. As the stock market is dynamic, the NAV value is dynamic too. The NAV price changes constantly. Throughout the day, you can’t pinpoint an exact value. Due to this dynamic nature of NAV price, the mutual fund companies calculate NAV price only once in a trading day. If you are an investor in the mutual funds market, you can redeem shares at a fixed price, which is the closing NAV of that scheme on a particular trading day.

It has been seen that the valuation method of mutual funds varies among different funds. Instead of considering a trading day’s closing price, some Asset Management Companies calculate NAV as an average of the last three traded prices. No matter how much the technique varies, the calculation of a mutual fund’s NAV is done by different AMCs only once per day.

Why do AMCs use NAV to calculate mutual fund pricing?

The main reason for following this mutual fund pricing policy is to promote:

  • Transparency in pricing
  • Standardisation in pricing

Therefore, the NAV valuation process offers investors a clear benchmark to assess the value of their investments. It helps to:

  • Maintain fairness in mutual fund pricing
  • Carry out smoother transactions
  • Enhance the trust and confidence of investors in the performance of the fund

Conclusion

The mutual price pricing is determined by the net Asset Value or NAV of that mutual fund scheme. If you redeem some or all of your mutual fund units on a particular trading day, you will know about the executed NAV price only the following day. This is because the closing day NAV price of a mutual fund scheme is only considered. In case, you want to know the sell price immediately, you either have to buy stocks or ETFs from the secondary market.

Are you starting your investment journey with mutual funds? If you are a beginner, you can explore the Bajaj Finserv Mutual Fund Platform. The platform has 1000+ mutual funds listed on their platform. You can compare mutual funds and even use the SIP Calculator or Lumpsum calculator to reach your financial goals.

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Frequently asked questions

How does mutual fund pricing work?

Mutual fund pricing is based on the NAV (net asset value) of each share. The NAV calculation formula is (Total Asset Value - Expense Ratio) / Number of Outstanding Units * Total Asset Value.

What is the pricing strategy of a mutual fund?

To learn about the pricing strategy of a mutual fund, the calculation has two parts. While one is NAV, the other is the applicable sales charge.

At what time NAV is calculated?

The NAV value is calculated at the end of a trading day. As the stock market in India closes at 3.30 pm, the last NAV value of a scheme is considered as the selling price of the scheme. Most mutual fund companies publish the NAV value of a fund on a daily basis, usually by 11 am.

Which pricing strategy is best?

The best mutual fund pricing strategy is the value-based one in most of the cases. In the case, where you are not sure about what the customers are willing to pay, competitive pricing is always a better strategy.

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