How is Mutual Fund's NAV calculated?

Say, during an NFO (New Fund Offer), an investor (named 'A') invested Rs. 100 and another investor (named 'B') invested Rs. 200. So total assets available with fund manager is Rs. 300. As during NFO a unit costs Rs. 10, 'A' will get 10 units of fund (100/10) and 'B' will get 20 units of fund (200/10).

Then say after an year that Rs. 300 (total funds collected during NFO) becomes Rs. 600 (as fund manager really managed the fund well).

Let us assume that no new investor has invested into the fund and existing investors did not make any redemption in the meantime. Hence total number of units remain same - 30 - 'A' is holding 10 units and 'B' is holding 20 units.

Then fund's NAV will be 20 (Current value of total assets / number of units i.e. 600/30).

So each unit's value (NAV) has changed now from 10 to 20. 'A's investment of Rs. 100 is now worth Rs. 200  (No. of units held × each unit's value i.e. 10 × 20) and 'B's investment of Rs. 200 is now worth Rs. 400 (20 × 20).

Now, let us assume that a new investor (named 'C') invests Rs. 100 into this fund. 'C' will get 5 units (amount invested / NAV i.e. 100 / 20).

So now total value of assets is Rs. 700 (600 + 100) and total no. of units is 35 (30 + 5).

NAV remains same: 20 (700 / 35)

Now, let us assume that existing investor 'B' redeems Rs. 200 from this fund. 'B' is actually redeeming 10 units (amount redeemed / NAV i.e. 200 / 20).

So now total value of assets is Rs. 500 (700 - 200) and total no. of units is 25 (35 - 10).

NAV remains same: 20 (500 / 25)

So when value of total assets changes in proportion with no. of units then NAV remains same.

When value of total assets changes not due to change in no. of units but due to market forces - then only NAV changes.

So movement of NAV only indicates the performance of a particular fund, nothing else. Lower NAV does not mean that a fund is available at cheap price or higher NAV does not mean that a fund is costly.

*The costs and expenses of the fund, such as management fee and operating expenses (registrar and transfer agent fee, marketing and distribution fee, audit fee and custodian fee) are deducted from total value of assets while calculating the NAV. This is not considered in the above example for the sake of simplicity.