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Who calculates a mutual fund's NAV?
Value Research
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April 13, 2006

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ImageWho calculates the Net Asset Value of mutual funds and who certifies if it is done correctly?

How would we know if the mutual fund is giving an incorrect picture to delay dividend distribution?

- Narendra Kushwaha

NAVs are calculated by the mutual fund houses themselves or through independent entities.

Reliance [Get Quote] Mutual Fund and ABN Amro Mutual Fund, for instance, get the calculations done by Deutsche Bank.

The market watchdog and mutual fund regulator, the Securities and Exchange Board of India, has laid down the regulations and guidelines with regard to how the funds must value their investments.

The above valuations may also be subject to audit on an annual basis.

Moreover, there is no advantage that a mutual fund can derive by disclosing incorrect NAVs in relation to dividend distribution.

No mutual fund is obliged to make dividend distributions at specific intervals of time or at the attainment of a specific NAV. They do so purely at their own discretion.

Therefore, an investor should have no apprehension as to the calculation of NAVs.

 How do you calculate the returns over a period of one year, three years and five years?

 Do you consider the NAV at the beginning and at the end of the period to calculate the returns?

 - Ganesh Murthy

To calculate the returns across different time periods, we use the adjusted NAVs of the funds.

Adjusted NAV means that if any dividend or bonus is declared by the fund during that period, it will be taken into account.

The reason is that when a fund distributes a dividend, its NAV falls by the amount of dividend. Therefore, calculating returns without adjusting for dividend will make the fund's return look lower than it actually is.

While the adjusted and un-adjusted NAVs for the growth option of a fund are quite likely to be similar, since no dividend or bonus is generally declared under the growth option, it may vary significantly in case of a dividend option.

Read How to pick the best mutual fund scheme to understand the difference between a dividend scheme and a growth scheme.

Further, the returns for a period exceeding one year are annualised and not absolute.

For example, the three-year return calculation will give you the percentage returns that you would have earned per annum on an average.

Let's say you invested at Rs 20 three years ago and today it is Rs 40. The absolute return would be 100% (Rs 20 double to Rs 40). But the annualised three-year return is 25.99%.

Got a question for Value Research? Please write to us!

Value Research


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Illustration: Dominic Xavier

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