NAV computation methodology for mutual funds
NAV computation methodology refers to the standardised process by which the per-unit value of a mutual fund scheme is calculated on each valuation date, covering the market valuation of every security in the portfolio, the accrual of income and expenses, and the division of net assets by units outstanding. In India, the methodology is prescribed by SEBI through its Mutual Fund Regulations, valuation circulars, and guidelines issued by AMFI, and is implemented by fund accountants on behalf of the asset management company.
A robust NAV computation process is critical to investor protection: it ensures that investors who subscribe or redeem on a given day receive a price that accurately reflects the current market value of the portfolio, rather than a stale or smoothed price that could allow arbitrage between incoming and outgoing unitholders.
Regulatory framework
The obligation to value scheme assets at market prices is rooted in Regulation 47 and Schedule VIII of the SEBI (Mutual Funds) Regulations, 1996, which require that NAV be calculated and disclosed every business day. Valuation norms are detailed in:
- SEBI Circular SEBI/HO/IMD/DF4/CIR/P/2019/102 (24 September 2019): Mandated full mark-to-market (MTM) valuation of all debt and money-market securities with residual maturity above 30 days, effective 1 April 2020. Eliminated the amortisation-based valuation that had previously been permitted for securities up to 91 days maturity.
- SEBI Master Circular for Mutual Funds (periodically consolidated): Consolidates NAV submission timelines, disclosure requirements, and valuation guidelines.
- AMFI Best Practices Guidelines on valuation of equity, debt, derivatives, and unlisted securities: Operationalise SEBI’s principles through standardised policies.
Two SEBI-approved valuation agencies, CRISIL Ltd and ICRA Analytics, provide daily prices for debt and money-market instruments, forming the primary source for NAV computation across the industry.
Step 1: Valuation of equity securities
Each equity security in the portfolio is valued as follows:
- Listed and traded: The closing price on the exchange with higher trading turnover for that security on the valuation date. For most large-cap stocks, NSE closing prices are used. For securities where trading turnover is higher on BSE, BSE prices apply.
- Listed but not traded (on the valuation date): The last traded price is used, subject to a fair value adjustment if the last trade is more than 30 days old. The AMC’s valuation committee must approve the fair value.
- Thinly traded or illiquid: SEBI defines a security as thinly traded if its average trading volume over 30 days is below prescribed thresholds. Such securities are valued using a price matrix prepared by AMFI-empanelled agencies or an AMC’s internal fair value committee.
- Unlisted equity (e.g., pre-IPO investments): Valued using methodologies approved by the AMC’s independent valuation committee, typically discounted cash flow, comparable company multiples, or the latest funding round price, with applicable liquidity discounts.
- Foreign-listed securities (for overseas fund of funds): Valued at the last available NAV or closing price converted at the RBI reference rate.
Step 2: Valuation of debt and money-market instruments
The shift to full MTM from 1 April 2020 means that virtually all debt instruments are repriced daily based on market yield curves published by valuation agencies.
Securities above 30 days residual maturity
Prices are sourced from CRISIL and ICRA valuation agencies. Each agency publishes prices for thousands of debt securities (government securities, state development loans, corporate bonds, commercial paper, certificates of deposit) by 7 p.m. each business day. If prices from both agencies are available, the average is typically used; if only one provides a price, that price is used. If neither agency can provide a price, the AMC valuation committee must derive a fair value using yield matrix extrapolation.
The daily MTM for debt mutual funds article covers the operational mechanics in greater detail, including how yield changes translate to price changes under modified duration.
Securities up to 30 days residual maturity
Securities with 30 days or fewer to maturity are valued on an amortisation basis. The purchase price is stepped up to the maturity value over the remaining days at a constant yield. This approach is considered acceptable because the short horizon limits MTM volatility and the amortised value converges to maturity value.
Derivatives
- Exchange-traded derivatives (equity futures/options held for hedging in dynamic asset allocation funds): Valued at the daily settlement price published by the exchange.
- Interest rate swaps / OTC derivatives: Valued using present value of cash flows discounted at the relevant swap yield curve as published by the Fixed Income Money Market and Derivatives Association (FIMMDA) or CCIL.
Step 3: Accrual of income
Several income items accrue daily but are settled periodically:
| Income item | Accrual basis |
|---|---|
| Coupon on bonds | Daily interest accrual at the stated coupon rate on face value outstanding |
| Discount on zero-coupon / T-bills | Daily accretion from purchase price to face value at the implied yield |
| Dividend from equities | Accrued on ex-date as receivable; recognised only when the issuer’s record date passes |
| Securities lending income | Accrued daily based on the agreed fee rate |
Step 4: Accrual of expenses
Daily NAV reflects expenses charged to the scheme for that day. The primary expense is the Total Expense Ratio (TER), which is divided by 365 (or 366 in a leap year) and multiplied by the previous day’s net assets to determine the expense accrual for the day.
Other expense line items include:
- Trustee fees: Fixed annual fee capped by regulation.
- Custodian charges: Typically a basis-point fee on AUM, billed monthly or quarterly but accrued daily.
- Registrar and Transfer Agent (RTA) fees: Billed per-folio or per-transaction, accrued daily on average.
- Audit fees, legal fees, bank charges: Accrued on best-estimate basis.
- Goods and Services Tax (GST) on management fees and other taxable services: 18% GST is added to management fees and charged to the scheme, forming part of TER.
The accrued expense per day is subtracted from assets when computing the net asset value. SEBI’s TER caps (under Regulation 52) limit the maximum daily charge, protecting investors from excessive fee extraction.
Step 5: Computation of net assets and NAV
Once all asset values and liability accruals are determined:
- Gross assets = Sum of all security valuations + receivables (accrued income, dividends receivable, subscription money received not yet deployed).
- Total liabilities = Payables (expenses accrued, redemptions outstanding, dividends declared but unpaid).
- Net assets = Gross assets − Total liabilities.
- Units outstanding = Units issued through all subscriptions to date − Units redeemed to date (as of end of prior business day; subscriptions and redemptions on the current day use the NAV being computed).
- NAV = Net assets ÷ Units outstanding, rounded to four decimal places.
For schemes with face value of Rs 10 per unit, an NAV significantly above Rs 10 indicates cumulative net appreciation. The face value itself is largely a notional reference; it does not represent a floor or guarantee.
Submission and disclosure timeline
| Fund category | NAV submission deadline |
|---|---|
| Equity, hybrid, solution-oriented, debt schemes | 11:00 p.m. on the same business day |
| Overnight funds | 9:00 p.m. on the same business day |
| Fund of funds (domestic) | 11:00 p.m. on the same business day |
| Fund of funds (overseas) | By 10:00 a.m. on the next business day |
NAVs are submitted to AMFI and simultaneously uploaded on the AMC’s own website. The fund accountant signs off on the NAV before submission, and the auditor of the scheme reviews the process during periodic audits.
NAV under side-pocketing
When a scheme creates a side pocket following a credit event in a debt holding, the portfolio is bifurcated into a main portfolio and a side-pocket portfolio, each with its own NAV. Existing unitholders receive units in both portfolios. The side-pocket NAV is marked to zero or fair value as determined by the valuation committee, and is updated as and when recovery proceeds come in. New investors can only buy units of the main portfolio, not the side pocket.
Role of the fund accountant and auditor
The fund accountant collects prices from valuation agencies and exchange feeds, processes the valuation model, and generates the trial balance for each scheme. The custodian independently verifies holdings by reconciling them against exchange settlement records and depository data. A daily three-way reconciliation, between the AMC’s investment system, the custodian’s records, and the RTA’s unit capital, is standard practice.
The auditor of the scheme conducts a half-yearly limited review and an annual full audit, specifically examining valuation policies, the consistency of their application, and adherence to SEBI-mandated methodologies.
Related articles
- Net Asset Value (NAV)
- Mark-to-market for debt holdings
- Daily MTM for debt mutual funds
- Total Expense Ratio
- Side-pocketed scheme
- Fund accountant
- Custodian of a mutual fund
- Auditor of a mutual fund
- Applicable NAV
References
- SEBI (Mutual Funds) Regulations, 1996, Regulation 47 and Schedule VIII.
- SEBI Circular SEBI/HO/IMD/DF4/CIR/P/2019/102 (24 September 2019), Valuation of money market and debt securities.
- SEBI Master Circular for Mutual Funds (2024).
- AMFI Best Practices Guidelines Circular No. 35P/MEM-COR/13/2019-20, Valuation methodology.
- FIMMDA Yield Curve publications.