Net Asset Value: How a Scheme Strikes It Each Day
Net asset value is what a scheme's holdings are worth, less what the scheme owes, divided by the units outstanding, and it is struck once for each dealing day after that day has ended. For the Girnar Large Cap Equity Fund, Rs 4,200 crore of net assets over 120.00 crore units comes to Rs 35.00 per unit. The day's charges came out before that division, so the figure is already net.
Here is what sits underneath that sentence, and it is smaller than most readers expect. There is no market in a scheme's units where two sides meet and settle on a number. There is a set of books, a stated method for valuing what is in them, and one division performed at the end of the dealing dayA day on which a scheme accepts applications and strikes a figure out of its own books. Not every calendar day is one.. The figure is a computation, not a quote, and almost everything that confuses a reader about it follows from that one distinction. A quote can be watched while it forms. A computation cannot be watched at all. Until its last input has settled there is no figure to watch, not even a partial one.
Girnar Asset Management Limited operates the Girnar Large Cap Equity Fund, an open ended equity scheme with net assets of Rs 4,200 crore and 120.00 crore units in issue, held across 3,80,000 folios. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations. The trustee company, the custodian, the registrar and transfer agent and the auditor appear by role throughout.
Three things are taken as settled from the start. Which day's figure attaches to a particular application is an attachment rule, and it is covered separately. The item by item contents of each side of a scheme's books, and the conversion of a running charge into a daily accrual, are covered separately as well. The definition of a unit, and the reason every unit of the same kind is equal, are covered separately too. Taking all three as given leaves one operation: striking the value.
What is a net asset value, exactly?
A net asset value is a quotient with three named parts, and the parts are worth saying slowly. On top, what the Girnar Large Cap Equity Fund holds and is owed, every holding valued for that day. Also on top, subtracted, everything the scheme owes, including the charges that accrued for that day whether or not any money left the scheme. Underneath, the units outstandingEvery unit in issue across the whole scheme on a given day, added up across all folios. on that day. The word net is not a flourish attached to the phrase; it names the subtraction in the middle, and most of what goes wrong on this subject goes wrong because somebody skipped that middle line.
Think of a housing society that has decided to sell its clubhouse and share out the proceeds among the flats. Nobody would divide the sale price by the number of flats. The society would first pay the electricity bill that came in last week, the security contractor for the month just gone and the accountant's fee, whether or not any of those had actually been settled yet. The remainder, after every obligation is counted, belongs to the flats. A scheme does exactly that, once for each dealing day, at the scale of Rs 4,200 crore and 120.00 crore units.
Before the strike is walked through: on one dealing day, what the Girnar Large Cap Equity Fund holds rises in value by Rs 120 crore. Nothing comes into the scheme and nothing leaves it. What happens to units outstanding?
How a Mutual Fund Calculates NAV: what has to happen, and in what order?
Four steps, and the order is the teaching. Girnar Asset Management values every holding in the Girnar Large Cap Equity Fund for that day, under the method the scheme has stated in its own documents. The manager then adds what is owed to the scheme. Income the scheme has earned counts here, and so does money due to it but not yet received. Everything the scheme owes is then subtracted, and that subtraction includes the accrued chargeAn amount the scheme recognises as owed for a day, and sets against its assets, even though no payment has left the scheme yet. for that day. Only then does it divide, by the units outstanding across the whole scheme on that day.
The order is not decorative. Steps one to three are all inputs to step four, and a division cannot run on inputs that have not finished settling. This is why nobody can see the answer earlier, and it is worth being precise about who nobody covers. The holder is not kept waiting on a manager who already knows. Kalyani Bhagat does not know it either, and neither does Sohail Merchant, whose operations team is assembling the very inputs the answer will be built from. Until the last valuation is in and the last accrual is booked, the figure is not being withheld. The figure has not been computed.
Put these three into the order Girnar Asset Management performs them for the Girnar Large Cap Equity Fund: divide by units outstanding, subtract what the scheme owes, value the holdings.
How a Fund's Assets and Liabilities Affect NAV: which side actually moves the figure?
Both sides reach the figure, but they reach it in very different ways, and separating them is the most useful move available at calculation level. The top line of the quotient is a net figure, not a gross one. A charge that has accrued and has not been paid is still a liability, and it still comes out before the division. Divide the gross assets of the Girnar Large Cap Equity Fund by 120.00 crore units and the answer is not the net asset value, and it is always too high.
How much too high cannot be answered from a single net figure, and saying so is more useful than filling the gap. Rs 4,200 crore is a net figure, and it carries no split of the two sides behind it. The direction can be said without any split at all. If the scheme owes anything whatsoever, and every operating scheme does, then a figure computed with the subtraction left out is strictly larger than Rs 35.00. Such a figure overstates what stands behind every unit in every folio, and it does so silently. It still looks like a figure per unit.
The gross assets of the Girnar Large Cap Equity Fund, before any liability is subtracted, are divided by 120.00 crore units outstanding. What has that produced?
The liability side of the Girnar Large Cap Equity Fund does not move with prices. Bills, fees and accruals sit there on their own schedule and take no notice of what the market did. So on a day when nothing comes into the scheme and nothing goes out, a rupee of movement in what the scheme holds is a rupee of movement in net assets, and therefore a movement of that rupee amount divided by units outstanding in the figure per unit. Rs 120 crore shared across 120.00 crore units is Rs 1.00 a unit. Rs 120 crore of movement on Rs 4,200 crore of net assets therefore arrives in the per unit figure as exactly Rs 1.00.
Run it in both directions and say the numbers out loud. Up: Rs 4,200 crore becomes Rs 4,320 crore, and Rs 4,320 crore over 120.00 crore units is Rs 36.00. Down: Rs 4,200 crore becomes Rs 4,080 crore, and Rs 4,080 crore over 120.00 crore units is Rs 34.00. The divisor did not participate in either. The stillness in the denominator is what makes the relationship as simple as it looks, and that stillness is a choice of the day rather than a law. On a day when money does come in or go out, units are created or cancelled and the denominator moves too.
What is the divisor, and what is it not?
The divisor is units outstanding as at that day, and it counts every unit in every folio across the whole of the Girnar Large Cap Equity Fund. All 120.00 crore of them, held by everybody, counted once. The divisor is not the number of units any one holder happens to have, and a holder's own unit count enters the strike at no point whatsoever. This sounds obvious written down and it is one of the most common confusions on the subject, because a reader who has just been told the figure is per unit reasonably assumes that their own units are somewhere in the arithmetic.
The mechanism settles this, not the intuition. Rs 1,00,000/- put into the scheme at Rs 35.00 buys 100000 divided by 35, or 2,857.142857 recurring, recorded as 2,857.143 units under this scheme's own three decimal convention. The recorded units multiplied back by Rs 35.00 give Rs 1,00,000.005: half a paisa above the Rs 1,00,000/- that was handed over, an artefact of rounding the unit count rather than a real gain. Rs 1,00,000.005 cannot be stated to the paisa without choosing a rounding rule, and the scheme's convention fixes only the unit count, so the exact product stands rather than a figure pretending to land on a paisa. And 2,857.143 appears nowhere in the strike. The scheme divided Rs 4,200 crore by 120.00 crore units, and it would have divided by 120.00 crore units if this particular holder had never existed.
A holder has 2,857.143 units of the Girnar Large Cap Equity Fund. On the day Girnar Asset Management strikes the figure, where do those units enter the calculation?
Why is the figure struck once for each day rather than continuously?
Because a computation has to wait for its inputs, and a quote does not. A price on an exchange exists because two willing sides met; it can be read at any moment because at any moment somebody has just agreed to it. The figure for the Girnar Large Cap Equity Fund exists because Sohail Merchant's operations team valued every holding, added what was due to the scheme, subtracted what the scheme owed including the day's accrual, and divided. Nothing about that sequence can be sampled halfway through. The figure arrives after the day rather than during it.
An everyday version. A caterer who has fed a wedding cannot tell the household what the evening cost while the guests are still eating. Not because the caterer is being difficult, but because the vegetables are still being weighed, the extra gas cylinder has been used but not yet invoiced, and two of the staff worked longer than booked. The number exists only after all of it lands. The household can watch inputs during the evening. The figure comes afterwards, once, and then it is the figure.
Rupees appear here to two decimal places and units to three, so that the arithmetic can be checked line by line. Neither convention is a rule. The precision a scheme must declare its figure to is one of the conditions the Securities and Exchange Board of India (SEBI) sets, and it is read at the source.
Move what the scheme holds, and watch what refuses to move
One control, one consequence. The control changes the value of what the Girnar Large Cap Equity Fund holds on a single day. Nothing comes into the scheme and nothing leaves it, so units outstanding are held at 120.00 crore throughout, and the liability side is held fixed so that the whole of the move lands in net assets.
The value of what the Girnar Large Cap Equity Fund holds is unchanged on the day, so net assets stay at Rs 4,200 crore, the divisor stays at 120.00 crore units, and the figure is struck at Rs 35.00 per unit.
The Girnar Large Cap Equity Fund returned 13.4 per cent net over one stated year, measured from one struck figure to another, and it carries an expense ratio of 1.65 per cent of net assets a year. What did a holder who stayed in for that year actually get?
Who decides how the holdings are valued?
Two parties, and neither of them can be summarised into a number. SEBI sets the requirements a scheme's valuation approach must meet. Girnar Asset Management states the valuation policyA scheme's stated method for deciding what each kind of holding is worth on a given day, including what it does when no price is available. the Girnar Large Cap Equity Fund follows in the scheme's own documents. Between them they answer the question every step of the strike depends on: what is this holding worth today? Valuation is the single largest place judgement enters a calculation that is otherwise pure arithmetic, and it is the reason two competent people could strike two slightly different figures out of the same books.
The effect on the rest of the strike is plain. Steps two, three and four are additions, a subtraction and a division; run twice, they give the same answer twice. Step one is a policy question wearing an arithmetic costume. When a holding trades constantly the answer is obvious, and the policy question is nearly invisible. When something has not traded, or the market for it is thin, the policy is doing all the work, and the figure the whole scheme divides by 120.00 crore rests on it.
Why is every return computed from it already net?
Because the subtraction happened before the division, twice. The figure at the start of the year was struck after that day's charges came out. The figure at the end of the year was struck after that day's charges came out. Every figure in between was as well. So a return computed from two struck figures has the charge inside both ends of it. The scheme's return is a net returnA return measured after the running charges have already been taken out of the figures it is computed from, so nothing further comes off it. as a matter of arithmetic, not as a matter of presentation. Nobody can choose to present it any other way.
Put the size of the daily subtraction next to the figure so it stops being abstract. An expense ratio of 1.65 per cent of net assets a year on Rs 4,200 crore is Rs 69.30 crore for a year, or about Rs 0.1899 crore for one day, and Rs 0.1899 crore across 120.00 crore units is about Rs 0.001582 a unit for that day. Roughly a sixth of one paisa. The daily amount comes out of the pool before the pool is divided, and never appears anywhere a holder can see. Rs 35.00 is the figure after it, and there is no version of Rs 35.00 from which it has not yet been taken.
The corollary is the one that catches people, and it catches careful people. Subtracting the expense ratio from a published scheme return charges the same 1.65 per cent twice. Once where the scheme actually charged it, inside both struck figures, and once again in the arithmetic laid on top. With most services it is quite right to ask what comes off the headline. The habit that produces the second deduction is normally a good habit, and that is exactly why it is hard to unlearn.
Why is a scheme's return net without anybody at Girnar Asset Management deciding to present it that way?
What goes wrong when a net figure is set against a gross one?
Rankings reverse, and this is where the word net stops being pedantry. A gross returnA return measured before fees are taken out, so a fee still has to be deducted from it to reach what the investor kept. has the fee still outside it and waiting to be deducted. A net return has the fee already inside it. Setting one against the other compares a figure that has been reduced with a figure that has not, and the difference between the two answers is not a nuance. The basisWhether a return is stated before fees or after them. Two returns on different bases are not comparable until one of them is restated. of a return is not a footnote to the comparison; on the numbers below it is the comparison.
The worked instance, and where it deliberately stops
Start with the strike itself. The Girnar Large Cap Equity Fund carries net assets of Rs 4,200 crore against 120.00 crore units outstanding, and 4,200 divided by 120.00 is Rs 35.00 per unit exactly. Inside that Rs 4,200 crore, on the liability side, sits the day's accrued charge of about Rs 0.1899 crore, about Rs 0.001582 a unit. The Rs 35.00 is already after it.
Now the year. The scheme returned 13.4 per cent net over one stated year, measured from one struck figure to another, against 12.1 per cent for its stated benchmarkThe stated measuring stick a scheme's result is set against. An index is not investable, so an index return carries no costs at all. over the same year. One scheme, one year. No fee comes off the 13.4 per cent afterwards. The figures it was computed from carried the charge already. Adding the expense ratio back gives a gross equivalent of about 15.05 per cent, and that figure is an approximation rather than a recoverable number: the charge accrues daily on a base that moves through the year, so backing it out properly lands somewhat higher, near 15.30 per cent. No reconciliation should be built on either. Both routes leave a direction rather than a number.
Then the comparison that gets the ranking backwards. A discretionary mandate returned 14.2 per cent gross over one year, with fees of 1.88 per cent of the portfolio charged separately. 14.2 less 1.88 leaves 12.32 per cent net. Set 14.2 against 13.4 and the mandate looks ahead by 0.8 points. Both figures are net once 12.32 is used, and that is the only honest pairing. Set 12.32 against 13.4 and the scheme is ahead by 1.08 points. The ranking reversed and nothing about either result changed; only the basis did.
| What is being compared | The mandate | The scheme | Who is ahead |
|---|---|---|---|
| As the two figures are usually quoted | 14.2 per cent gross, one year | 13.4 per cent net, one year | Mandate by 0.8 |
| Fees charged separately on the mandate | less 1.88 per cent | nothing to deduct | not yet comparable |
| Both restated on a net basis | 12.32 per cent net, one year | 13.4 per cent net, one year | Scheme by 1.08 |
And then stop, deliberately and visibly. One scheme and one mandate over one year each settle nothing about either route, either manager or either structure, and the arithmetic above was run to fix the basis rather than to rank anything. One further wrinkle is worth naming. An index is not investable and nobody pays anything to hold it, so the 12.1 per cent benchmark figure is a costless one, and even the 1.3 point gap between 13.4 and 12.1 is not like for like either. Put both onto one basis and that gap is nearer three points than one. A benchmark can be computed on price alone or with income reinvested, and which of the two the stated benchmark uses has to be established rather than assumed.
A discretionary mandate returned 14.2 per cent gross over one year, with fees of 1.88 per cent charged separately. The Girnar Large Cap Equity Fund returned 13.4 per cent net over one year. On the arithmetic alone, which of the two is ahead?
Does the comparison just worked settle which of the two routes is the better one?
What is a net asset value not?
A net asset value is not a return, not a forecast and not a measure of quality. Nor is it a price anybody is quoting, or a discount or a premium to anything. A struck figure is a snapshot of one scheme's own books on one day, and everything else a reader wants from it has to be computed from at least two of them plus the period they span.
One misreading deserves killing outright. The mistake is the most common one attached to this figure, and it survives being told once. A scheme whose figure is Rs 35.00 is not more expensive than a scheme whose figure is Rs 12.00, and a scheme at Rs 12.00 is not cheaper. Rs 1,00,000/- buys 2,857.143 units of the first and would buy a different unit count of the second, and in each case what has been bought is a proportion of that scheme's own pool. The figure per unit is a quotient, and a quotient says nothing about its numerator until its denominator is known. Two schemes with identical portfolios and different unit counts would print different figures per unit forever, and neither would be dearer than the other by a single paisa.
Who reaches for this figure on a working day, and what for?
Three people use the struck figure of the Girnar Large Cap Equity Fund, and none of them uses it the same way. Sohail Merchant, who heads operations, uses it as an output to be checked: net assets, units outstanding, one division, and a reconciliation that has to close before the figure goes anywhere. His question is never what the figure means. His question is whether every input settled and whether the division reproduces from the two components.
An analyst uses two of them and never one. A single struck figure carries no information about performance, so the analyst takes the figure at the start of a period and the figure at the end, states the period out loud, states that the result is net, and refuses to compare it with anything whose basis is unstated. The refusal to compare across an unstated basis is the working skill on this subject; the arithmetic is the easy half.
A household reading a statement uses it for something simpler and more useful than either. Multiply the units in the folioThe account in the scheme's records that holds one holder's units and details. by the figure per unit, and the product is the value of the holding on that day. One multiplication is genuinely all a single struck figure supports, and treating it as the answer to any larger question is where the trouble starts. Whether the household should do anything about that value is not a question this arithmetic can answer.
The error that gets made, and what it costs
Somebody reads that the Girnar Large Cap Equity Fund returned 13.4 per cent net over one stated year. The same reader then sees an expense ratio of 1.65 per cent of net assets a year, subtracts, and writes down 11.75 per cent as what they call the real return. The charge has already been taken. The 13.4 per cent was computed from two figures that both carried it, so deducting it a second time understates the year by 1.65 points on a number that was already correct.
Write down what that costs and it is worse than the single wrong figure. A holder who believes they earned 11.75 per cent when the arithmetic says 13.4 per cent net has one bad number in a notebook. A holder who has formed the habit of subtracting the ratio from every scheme return has a systematic error, and the moment they set one of those reduced figures against a genuinely gross figure from somewhere else, the error runs in both directions in the same comparison. The mirror version is the more damaging one: putting the scheme's 13.4 per cent net against a mandate's 14.2 per cent gross puts a figure with the fee inside it against a figure with the fee still outside it, and reverses the ranking.
None of this means the reader should have known which was which. Almost nothing published alongside a return states whether it is gross or net, and the two words look like a technicality right up to the moment they change the answer. The remedy works better as a rule than as a caution: before two returns are compared, the period of each and the basis of each are established. If either basis is not stated, the comparison cannot be made yet, and the honest next step is to go and find out rather than to proceed carefully.
Last one, and it is the plainest question here. Is a net asset value a return?
Which conditions does SEBI set, and where are they read?
Several conditions are left to the source. The requirements a scheme's valuation approach must satisfy, the deadline by which a struck figure must be published, the precision it must be declared to, and the conditions that decide which day's figure attaches to an application are all set by SEBI and are revised. A stated figure for any of them does not become dated when it changes; it becomes wrong.
The current position is read at sebi.gov.in, in the master circular for mutual funds, on the day it is needed. The Association of Mutual Funds in India (AMFI) at amfiindia.com publishes the industry's struck figures and is the place those are found, but it publishes rather than decides, and it is not the maker of any rule.
References
| Source | Document | Where |
|---|---|---|
| Securities and Exchange Board of India | The master circular for mutual funds, named here for the existence of the requirements a valuation policy must meet, the publication and precision conditions attaching to a struck figure, and the conditions that decide which day's figure applies to an application | sebi.gov.in |
| Association of Mutual Funds in India | Named only as the place the industry's struck figures are published, and not as the maker of any rule | amfiindia.com |
Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, Kalyani Bhagat, Sohail Merchant and the discretionary mandate used in the comparison are invented.
Educational material. Not advice on any investment, tax, budget or market position.