(this is the 3rd article in this series. Please do read at least article 2 - what makes the price of an equity mutual fund go up or down)
The value of an equity mutual fund is the sum total of the value of all the shares it holds. Since share prices change daily, so does the value of the fund. Thus, the mutual fund portfolio has a daily value based on that day’s share prices of the companies it holds.
Daily Net Asset Value (NAV) calculation
The stock market closes at 3.30pm on each business day. The mutual fund company then values its portfolio based on the closing share prices. Any cash in the bank is added and payables to others are subtracted to determine the asset value of the fund. A daily estimation of the expenses of running the fund is reduced from the asset value. This total asset value is divided by the number of units issued so far, resulting in that day’s per unit NAV.
Most mutual funds are “open-ended” and new investments (by you and me) for that day increase the number of units (and cash) in the fund. Similarly, new withdrawals for that day decrease the number of units (and cash). Any surplus cash is invested by the fund manager when he or she sees fit, while any deficit is met by selling shares.
Here’s an example of NAV with a mutual fund that has 1 share each of 3 companies. For simplicity, we’ve assumed the number of units remains the same over time.