How the gains made in the stocks reflected in mutual fund NAV

Your team doing wonderful and informative work in spreading the basics of mutual funds. Congrats for that. My query is in mutual fund equity holding if particular equity say X company share price appreciate or increase in end of the one trading day then how the appreciated value gets Incorporated in NAV after deducting funds expense ratios, like if price share increases to 130rs/share from 100rs then how that 30rs gets added to NAV? Also how honestly fund manager will add ALL the entire gains he made during selling of equity holding if it's appreciated in current market to the fund from where he sold the equities? Is it possible that they can keep some part of gains without disclosing it to the investor or not added to fund NAV because common investor can't know how sincerely/honestly they distribute gains if made any to the fund after deducting their fund expenses? Just doubt as in direct equity like stock market if gains made any will be given to the investor after taking brokerage charges?

Aug 21, 2017 by Ravi, Kolhapur | Mutual Fund

At the outset, I thank you for the kind words about Advisorkhoj.

With regards to your query, kindly note that the price of the stocks held in the mutual fund portfolio keeps changing every day post closure of the stock market. NAV is declared every day (only if the stock market is open) after the trading hours. NAV is calculated by dividing the net assets (market value of the securities and cash held by the fund minus the liabilities) of the fund by the total number of units outstanding. Unlike stock prices which changes constantly during the day depending on the activity in the share market, the NAV is determined on a daily basis and computed at the end of the day based on the closing price of all the securities that the mutual fund scheme owns after making appropriate adjustments like expense ratios etc.

The specific query you have about how the gain or loss of a stock is accounted, let us understand this through an example -

Suppose, XYZ mutual fund scheme holds 100,000 number of 'Stock A'. Yesterday's closing price of the stock was Rs 90. Therefore, the total value in the portfolio for this stock was Rs 90,00,000 (100,000 shares x Rs 90). However, the stock appreciated say by Rs 30 next day, then the total value of the stock in the portfolio at the end of the day would be Rs 12,00,000 (100,000 shares x Rs 120).

Similarly, closing prices of all the stocks in the portfolio is calculated in the same method at the end of the day and the NAV is declared thereafter. NAV is calculated, as we mentioned above, by dividing the net assets (market value of the securities and cash held by the fund minus the liabilities) by the total number of units outstanding.

For example the total assets of the scheme yesterday was 100 Lakhs and the outstanding units 67,000 then the NAV was Rs 149.2537 (Rs 100 Lakhs / 67,000 units). Assuming the portfolio value after closure of today's market is Rs 105 Lakhs, then the today's NAV would be Rs 156.7164 (Rs 105 Lakhs / 67,000 units).

You can totally trust the fund manager as well as the AMC as they are governed by SEBI and subject to regular supervision and audits. Moreover, there is a board of trustees who looks after the interest of the unit holders.There is no way a fund manager or the AMC can hide the gains from you.

Thanks for writing to Advisorkhoj.

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