Calculating Net Asset Value (NAV) for Investment Trusts

Open the fact sheet of any mutual fund scheme and one number jumps out immediately: the NAV. Most first-time investors assume a lower NAV means a “cheaper” fund and a higher NAV means an “expensive” one. That single misunderstanding shapes a lot of poor investment decisions. Understanding how Net Asset Value is actually calculated, and why it behaves differently across fund structures, is one of the most practical skills a commerce student or a new investor can pick up.

What is net asset value? 🔗

Net Asset Value, or NAV, is simply what is left of a fund’s assets after every liability it owes has been paid off. The U.S. SEC’s investor education portal describes it as an investment company’s total assets minus its total liabilities, a figure that moves daily as the value of the underlying holdings and outstanding dues change. Because a mutual fund pools money from thousands of investors and buys a portfolio of securities on their behalf, NAV is the mechanism that tells each investor exactly what their share of that pool is worth on any given day.

Think of NAV as the per-unit price tag of a mutual fund scheme, similar to how the price of a share tells you what one unit of a company is worth. The difference is that a stock price is set by continuous buying and selling on an exchange throughout the day, while NAV is calculated only once, after the market closes.

How NAV is calculated: the formula 🔗

The formula itself is straightforward, even though the calculation behind it involves valuing an entire portfolio.

What counts as an asset 🔗

The asset side includes the current market value of every security the scheme holds, such as equity shares, bonds, debentures, and money market instruments, along with any cash the fund is holding and income that has accrued but not yet been received, like dividends or interest.

What gets subtracted as liabilities 🔗

On the liabilities side, funds subtract the running costs of managing the scheme. This includes the fee paid to the Asset Management Company, along with registrar charges, custodian fees, marketing costs, and audit fees. Collectively, these costs are capped as a percentage of the fund’s assets and disclosed as the expense ratio in the scheme document. Any pending redemption payments owed to investors who have already exited the fund are also deducted before arriving at the net figure.

Once the net value is arrived at, it is divided by the number of units currently outstanding in the scheme. So if a fund’s net assets amount to ₹500 crore and it has 50 crore units outstanding, the NAV works out to ₹10 per unit. This per-unit figure is what appears on your account statement and what determines how many units you receive for the amount you invest, or how much you get back when you redeem.

A worked example 🔗

Suppose a scheme holds equity shares and bonds worth ₹980 crore, plus ₹25 crore in cash and accrued dividends, taking total assets to ₹1,005 crore. Against this, the fund owes ₹4 crore in management and administrative fees and ₹1 crore in pending redemption payouts, bringing total liabilities to ₹5 crore. Net assets, therefore, stand at ₹1,000 crore. If the scheme has 100 crore units outstanding, dividing the two figures gives an NAV of ₹10 per unit. Repeat this exercise every single trading day and you get the daily NAV series that fund houses publish.

Why NAV matters, and why “high” or “low” NAV is a myth 🔗

A common mistake is treating NAV like a stock price and assuming a fund with a ₹1000 NAV is more “expensive” or better performing than one with a ₹15 NAV. This is not accurate. NAV only tells you the current value per unit; it says nothing about the quality of the fund’s underlying portfolio or its future returns. Two funds that deliver identical percentage returns will grow your investment by the same amount in rupee terms, regardless of whether their starting NAV was ₹10 or ₹100. What actually matters is the fund’s strategy, its expense ratio, the consistency of its historical performance, and how well it matches your own risk appetite.

Where NAV genuinely helps is in tracking performance over time and in comparing a fund’s stated worth against what the market is willing to pay for it, particularly when a fund’s units are also traded on an exchange.

NAV in open-end funds versus closed-end investment trusts 🔗

This is where the outline for this topic gets interesting, because NAV does not work identically across every type of investment vehicle.

Open-end funds: you always transact at NAV 🔗

Most mutual fund schemes in India are open-end funds, meaning they continuously issue new units when investors buy in and cancel units when investors redeem. There is no upper limit on the number of units in circulation, and critically, every purchase or sale happens directly with the fund house at that day’s NAV. Because there is no secondary market involved, an open-end fund’s price can never trade at a premium or discount to its actual NAV; what you see is exactly what you get.

Closed-end funds: NAV and market price can diverge 🔗

Closed-end funds work differently. They raise a fixed pool of capital through a New Fund Offer and issue a fixed number of units. After that window closes, the fund does not issue or redeem units directly. Instead, if the scheme is listed, investors buy and sell existing units on a stock exchange, just like shares of a company.

This listing structure creates a gap between two numbers: the NAV, which reflects the actual value of the underlying portfolio, and the market price, which is driven by investor demand and supply on the exchange. When the market price falls below the NAV, the fund is said to be trading at a discount. When it trades above NAV, it is trading at a premium. This gap exists specifically because closed-end fund prices respond to market sentiment, not just to the value of the assets the fund holds. In global markets, regulators such as FINRA note that most closed-end funds have historically traded at a discount to their NAV rather than at a premium, which is a useful reminder that a “cheap-looking” price does not automatically mean a bargain. An investor buying a closed-end fund unit at a steep discount to NAV is, in effect, buying the underlying assets for less than their stated worth, but that discount can also persist or widen depending on liquidity and market perception.

Why the distinction matters for investors 🔗

For a typical open-end mutual fund investor, this distinction rarely matters day to day, since transactions always happen at NAV. But for anyone evaluating a listed closed-end scheme, comparing the trading price against the declared NAV is an essential step before investing. Ignoring this gap can mean overpaying for units that are, on paper, worth considerably less.

When and how NAV gets published 🔗

In India, fund houses are required to disclose NAV daily. Open-end fund NAVs are calculated at the end of each trading day based on the closing market value of the securities the scheme holds, and this figure is published on the fund house’s website as well as on the AMFI portal, giving every investor access to the same information at the same time.

This daily disclosure is also what determines the applicable NAV for your transaction, depending on when you place your request relative to the scheme’s cut-off time. For most equity schemes, an investment made before the market’s closing cut-off gets that same day’s NAV, while a request placed after the cut-off is processed at the next business day’s NAV. Cut-off timings can vary by scheme category, so checking the scheme information document before placing a large transaction is worth the extra minute.

A quick note on hybrid structures 🔗

Not every scheme fits neatly into the open-end or closed-end box. Interval funds, for instance, behave like closed-end funds for most of the year but open up for redemptions during specific windows, at the prevailing NAV. These structures exist precisely to balance the stability closed-end funds offer with a limited degree of the liquidity investors expect from an open-end scheme.

Putting it together 🔗

NAV is, at its core, an accounting exercise: value everything the fund owns, subtract everything it owes, and divide by the number of units. But how that number interacts with the market price depends heavily on whether you are holding an open-end fund, where NAV is the only price that ever applies, or a closed-end investment trust, where NAV is a benchmark that the market price can drift away from. For a commerce student, this is a neat illustration of how the same accounting principle, assets minus liabilities, plays out very differently depending on the market structure it operates within.

What do you think? If you were choosing between an open-end fund and a closed-end fund trading at a steep discount to its NAV, which factors would weigh most heavily in your decision? And why do you think investors are often willing to pay a premium over NAV for certain closed-end funds despite knowing the underlying assets are worth less?

References

1. https://www.investor.gov/introduction-investing/investing-basics/glossary/net-asset-value
2. https://www.mutualfundssahihai.com/en/how-nav-calculated
3. https://www.tatamutualfund.com/blogs/what-is-nav-in-mutual-funds-and-how-is-it-calculated
4. https://www.icici.bank.in/personal-banking/blogs/investments/mutual-funds/open-ended-and-close-ended-funds
5. https://www.fincart.com/blog/open-ended-and-closed-ended-mutual-funds
6. https://www.finra.org/investors/insights/opening-up-closed-end-funds
7. https://www.kotakmf.com/Information/blogs/open-ended-vs-close-ended-mutual-funds-schemes
8. https://www.icici.bank.in/personal-banking/blogs/investments/mutual-funds/mutual-fund-nav