Applicable NAV: Which Day's Price You Actually Get

The applicable net asset value is the day's figure an application is measured against, and it is decided by when the application and the money reach the scheme rather than by when the decision to apply was made. The Girnar Large Cap Equity Fund strikes one figure a day out of its own books, so at the moment of applying nobody knows the figure yet.

Almost every reader arrives with one silent picture in their head, and the picture is wrong. In the picture a number sits on a screen, somebody reaches for it, and somebody gets it. A shop works that way. A scheme does not. Nobody is quoting anything, nobody is on the other side of the table, and the number the application will be measured against has not been calculated yet. Once that is clear, the whole idea stops being slippery and becomes almost mechanical.

One scheme runs through this guide from end to end. Girnar Asset Management Limited operates the Girnar Large Cap Equity Fund, an open ended schemeA scheme that issues new units to people coming in and cancels units for people going out, instead of trading a fixed number of units between buyers and sellers. with net assets of Rs 4,200 crore and units outstandingThe total number of units in existence across every holder of the scheme on a given day. of 120.00 crore. Divide the first by the second and one unit is worth Rs 35.00 exactly. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations.

Three things sit underneath this subject and are set out elsewhere: what a scheme is and who runs it, what a unit is as a legal interest and who the trustee company protects, and what it means for a charge to accrue, the subject that also carries the difference between an asset and a liability. Taking the vehicle as given leaves one question: which of the scheme's daily figures an application is considered against, and what decides that.

What exactly is the applicable net asset value?

The applicable value is an attachmentThe link between one application and one particular day's computed figure. The application does not create the figure and does not negotiate it; it is simply matched to one of them. rule, and calling it that removes most of the confusion in one move. The Girnar Large Cap Equity Fund produces one figure for each dealing dayA day on which the scheme accepts applications and computes a value. Weekends and holidays are not dealing days, which is why a run of figures is not a run of calendar dates.. The figures make a run going back for as long as the scheme has existed and forward for as long as it continues. The applicable net asset valueThe one figure out of that run which a particular application is measured against, decided by rules rather than by choice. question is not what the figure is. The question is which one of that run an application gets pinned to.

One thing is missing from that description: there is no second person. Nobody looks at an application, considers it, and names a number. There is no bargaining, no spread, no better price for turning up at a good moment and no worse one for turning up at a bad one. The figure was going to be what it was going to be whether anybody applied or not, and the only question the applicable value rule settles is which of those already-determined figures an application is set against. An application is not an offer that gets accepted. An application is a request to be matched to a computation.

Here is an everyday version. Think of a household that sends its milk order to a dairy every morning. The dairy does not quote a price when the order is written. The dairy works out its own cost for the day after the day is over, and the order is billed at whichever day's rate the delivery falls into. The household has no ability to argue the rate, and no ability to see it when the order is placed. The household can influence only which day the order lands in. The applicable value question has exactly that shape, transplanted.

Why does a scheme carry one figure a day instead of a running price?

Because there is nothing for a running price to be made out of. A price that moves through the day is made by people disagreeing in public: somebody willing to sell at one number, somebody willing to buy at another, and a stream of trades in between. A quoted price needs two sides. An open ended scheme has one. When a holder comes in, the scheme creates new units; when a holder leaves, it cancels units. Bringing units in and out that way is called creation and cancellationUnits of an open ended scheme are brought into existence when people come in and destroyed when people go out, rather than changing hands between two outside parties., and it happens against the scheme itself, at a figure the scheme computes.

The figure is an output of the scheme's own books, not an opinion formed by buyers and sellers, and that single difference explains why it appears once and not continuously. Nobody is bidding. There is no order book to read, no last traded number to quote. There is a set of holdings, a set of liabilities, and a division. A division does not tick.

Compare it with a vegetable seller at the end of a street. On a market stall a price moves all day because two people are actually haggling and the number is whatever they land on. Now compare that with the electricity bill for the same street. The utility does not haggle. The utility measures, applies its own workings, and produces a figure once for a period. Nobody has ever negotiated a meter reading. A scheme's daily figure belongs to the second category, and readers get into difficulty when they carry the habits of the first one across.

Why can nobody see the figure at the moment of applying?

Because of the order in which the arithmetic has to happen. The figure for a dealing day is worked out from what the scheme held and what it owed on that day. Its holdings move in value right up to the point the market stops moving. The running charges for that day accrue inside the same calculation. Until the day is finished, there is no complete set of inputs, and a division cannot be performed on inputs that do not exist yet. So the struckStruck means computed and fixed for a particular dealing day. Once a figure is struck it does not move again; the next day gets its own. figure for today arrives only after today has ended.

At the moment an application is made, the figure it will attach to has not been computed, and nobody holds it: not the holder, not the distributor who submitted the form, and not Kalyani Bhagat, the manager of the portfolio. The absence is worth sitting with, and it is the part readers most want to soften. There is no window, no privileged desk, no screen inside the asset manager that shows the answer early. The information is not being withheld. The figure has not been produced yet.

The figure a reader sees this morning is real, but it belongs to a day that is already closed. The figure is history presented in the shape of a headline. Treating a closed day's figure as the number currently available is the single most common error on this subject.

What decides which day's figure attaches to an application?

Two separate things have to reach the scheme, and they are genuinely separate. The first is the application itself, the instruction that says who the applicant is, which scheme is wanted and how much. The second is the money. People collapse these into one event because in their own experience they happen with one tap, but the scheme's records treat them as two arrivals with two timestamps, and the rule that decides the attachment reads both.

One part of this belongs to the regulator, and the reason matters as much as the rule. There is a deadline in each dealing day, and where an arrival falls relative to it decides whether the same business day's figure or the next business day's figure attaches. There are also conditions about the money being available to the scheme rather than merely sent. The Securities and Exchange Board of India (SEBI) sets that deadline and those conditions in its master circular for mutual funds, and both have been changed before and will be changed again. The current text sits at sebi.gov.in.

A printed clock time, minimum amount or scheme-type carve-out is trusted by a reader precisely because it looks specific, and the day the condition moves, the reader is confidently wrong. The shape stays put even as the numbers move: two arrivals, a deadline, a funds condition, and a rule that differs by the type of scheme. The current text of all four belongs in the circular, and in the scheme's own documents, read on the day it is needed.

Why does the money have to arrive and not just the paperwork?

The funds condition has a structural answer that stands on its own, quite apart from any rule. Units of the Girnar Large Cap Equity Fund are a claim on the scheme's assets. Creating a unit means adding to the number of claims. If a unit were created for a new holder before that holder's money reached the scheme, the total claims would rise while the total assets stayed where they were. Nothing would have been added to the pool, but something would have been added to the queue.

A share of an unchanged pool would have been diluted by claims that nothing had yet paid for, and the people already holding units would be quietly carrying the new holder's position until the money turned up. That is why a funds condition exists at all. The exact form of the condition is regulatory, but the reason underneath it is structural and would be a problem even if no regulator existed.

Picture ten households running a joint kitchen fund for a wedding. Everyone puts in an agreed amount and everyone takes an agreed share of what the fund buys. An eleventh household says it will pay next week, and is written into the share list today. The rice bought this week has not grown. The same rice is simply being divided eleven ways instead of ten, and the ten are feeding the eleventh out of their own share until the payment lands. Nobody stole anything, and yet ten people are worse off. A scheme that created units against money it did not hold would be doing precisely that, at scale, to 3,80,000 folioThe account in the scheme's records that holds one investor's units and their details. A holder can have more than one. records at once.

Does the figure exist on a day when nobody applies?

Yes, and this is the fact that puts the whole subject the right way round. The Girnar Large Cap Equity Fund strikes a figure for every dealing day because it has to value the pool for every dealing day, regardless of whether a single form arrived. Applications do not summon the figure into being. The figure is produced first, for the whole pool, and any applications that day are then attached to it.

The figure is struck first and the application attaches to it, never the other way round. A reader who thinks of the net asset value as the price they paid has the direction of causation backwards. The figure describes the pool, not the transaction, and it would have been the same number had the applicant never heard of the scheme.

Part of why the mistake is so natural is that the published figure looks exactly like a quote. The published figure is a name and a number, laid out the way a shop lays out a name and a number. Nothing in its appearance signals that it is an output rather than an offer, that it is already closed rather than currently available, or that it belongs to the pool rather than to any one holder. The shape of the artefact is doing the misleading, not the reader.

Is the applicable figure different for a bigger holder?

No, and refusing to bend on this is what makes a pooled vehicle a pool. The figure struck for a dealing day is one figure for the whole scheme, or one for each plan where a scheme has more than one. The figure is not quoted differently to somebody bringing a large amount, it is not improved by asking, and it is not personal in any sense. Two holders in the same plan whose applications attach to the same dealing day are attached to identical arithmetic.

The moment a figure could be quoted better to one holder than another, the remaining holders would be paying for that improvement out of the same pool. The improvement would be the same dilution as units created before the money arrived. Sameness is not a courtesy the asset manager extends. Sameness is a structural requirement of the vehicle, and it is why a small holder and a large one are on precisely the same footing here even though they are on very different footings almost everywhere else in finance.

One honest qualification. Different plans of the same scheme carry different running charges, so their figures diverge over time even though the holdings behind them are identical. Divergence between plans is a charges question, covered separately. Within one plan on one day, there is one figure and no exceptions.

What does this look like on one scheme's own numbers?

Start by producing the figure rather than quoting it. The Girnar Large Cap Equity Fund has net assets of Rs 4,200 crore and 120.00 crore units outstanding. Written out in full rupees, that is Rs 42,00,00,00,000/- across 1,20,00,00,000 units. Divide: Rs 42,00,00,00,000/- by 1,20,00,00,000 units gives Rs 35.00 a unit, exactly, with nothing left over. Rs 35.00 is the struck figure for that dealing day, and this scheme's example carries no other day's figure.

Now the attachment, shown purely as arithmetic. An application of Rs 1,00,000/- attaching to a struck figure of Rs 35.00 gives 1,00,000 divided by 35.00. The result is 2,857.142857 units repeating. The scheme records units to three decimals. The recorded count is 2,857.143 units. Check it backwards: 2,857.142857 units at Rs 35.00 comes to Rs 1,00,000/- exactly, so the division holds in both directions.

Now the sensitivity. Assume that a different dealing day's struck figure had been one per cent higher, at Rs 35.35. One figure on one day has no series behind it, so nothing in the arithmetic says whether a move of that size is likely, unlikely, typical or expected. The one per cent is an input chosen because it is easy to follow.

Two things in that table deserve saying out loud. First, 28.289 units is a rounded figure. The exact difference is 28.288543 units, and it happens that rounding the exact difference to three decimals and subtracting the two rounded unit counts both land on 28.289, so the two routes genuinely agree here rather than merely appearing to. Second, the unit count fell by about 0.99 per cent while the figure rose by exactly 1.00 per cent, and those are not the same number. Dividing by something one per cent larger leaves 1 divided by 1.01, or 0.990099 of the original, a fall of 0.9901 per cent. The two are close enough to describe together in a sentence and not close enough to call equal.

The rupees never changed. Rs 1,00,000/- went in either way, and what moved was how much of the pool the holder ended up with. Nobody was charged more and nobody was charged less. The entire practical consequence of the applicable value question sits in the unit count and nowhere else.

One thing is left unresolved. Which of those two figures the application would actually have attached to is not an arithmetic question at all. The attachment is settled by when the application and the money reached the scheme, measured against conditions SEBI sets.

So what actually moves when a different day's figure attaches?

Exactly one thing, for money going in: the unit count. The rupees are fixed by the applicant, so they cannot move. The number of units the scheme creates is the rupees divided by the figure, so it absorbs the whole of any difference. The unit count is the entire practical consequence. Readers routinely expect the amount debited to change and are then confused when it does not.

Nothing about the applicable value question changes the amount paid, and everything about it changes the units received. Read with that in mind, a statement stops being mysterious. The amount will match the sum sent, to the rupee. The units will match the amount divided by whichever figure attached, to three decimals. If the units look wrong, the figure being divided by is the thing to check first, not the scheme's arithmetic.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.