Net assets
Also written Unit-holders' funds · Unitholders' funds in the scheme
The unitholders' funds in a scheme: the market value of everything it owns, plus income accrued and receivables, minus what it owes to others — the figure NAV divides by the number of units.
In plain language
Picture the scheme's balance sheet. On one side are its assets — the investments it holds, valued at today's market price; income it has earned but not yet received, such as dividends declared or interest due; and receivables, such as money due on shares it has sold. On the other side are liabilities to outsiders — money owed for securities bought, short-term borrowings, and expenses that have been incurred but not yet paid.
Take the second away from the first and what is left belongs to the investors. That is the scheme's net assets, which the workbook also calls unit-holders' funds in the scheme.
The workbook draws three conclusions from its example:
- Net assets include the amount originally invested, the profits booked, and the appreciation in the portfolio.
- Net assets rise when the market prices of holdings rise, even if nothing has been sold.
- A scheme cannot show better profits by delaying payments — expenses count when they relate to the period, paid or not. That is the accrual principle, and it cuts the other way for income too.
How it works
The workbook's scheme: investors buy 20 crore units at Rs 10, so Rs 200 crore is mobilised. Rs 140 crore goes into equities, which appreciate 10 per cent; Rs 60 crore goes into bank deposits and money market instruments. Interest and dividend received is Rs 8 crore, expenses paid are Rs 4 crore, and a further Rs 1 crore is payable.
| Liabilities side | Rs crore |
|---|---|
| Unit capital (20 crore units × Rs 10) | 200 |
| Profits (8 − 4 − 1) | 3 |
| Capital appreciation (10% of 140) | 14 |
| Unit-holders' funds in the scheme | 217 |
| Expenses payable | 1 |
| Scheme liabilities | 218 |
| Assets side | Rs crore |
|---|---|
| Market value of investments (140 + 10%) | 154 |
| Bank deposits and money market (60 + 8 − 4) | 64 |
| Scheme assets | 218 |
Net assets are Rs 217 crore, giving an NAV of Rs 217 crore ÷ 20 crore = Rs 10.85.
What counts as a current liability is defined: payables for securities bought, and borrowings for a period not exceeding six months to meet liquidity needs.
Net assets then drive much more than NAV. TER limits are percentages of daily net assets; trail commission is calculated on the net assets attributable to units sold; and portfolio turnover is measured against average net assets.
The formula
Net assets = Market value of investments
+ Accrued income (dividend / interest due, not received)
+ Receivables and other current assets
− Current liabilities (payables for securities bought,
borrowings up to six months)
− Accrued expenses
NAV = Net assets ÷ Number of outstanding units
A worked example
The workbook's second worked example gives:
| Item | Rs crore |
|---|---|
| Value of stocks | 230.00 |
| Money market instruments | 5.00 |
| Dividend accrued but not received | 2.39 |
| Amount receivable on sale of shares | 2.34 |
| Less: amount payable on purchase of shares | (7.50) |
| Less: fees payable | (0.41) |
| Net assets | 231.82 |
| Units outstanding | 2.65 crore |
230 + 5 + 2.39 + 2.34 − 7.50 − 0.41 = 231.82
NAV = 231.82 ÷ 2.65 = Rs 87.48
Now see why net assets must be at market value. The workbook takes a scheme with unit capital of Rs 1,00,000 (10,000 units of Rs 10) but net assets of Rs 1,50,000, so its NAV is Rs 15.
| Issue 100 units at face value Rs 10 | Redeem 100 units at face value Rs 10 | |
|---|---|---|
| Net assets | Rs 1,51,000 | Rs 1,49,000 |
| Units | 10,100 | 9,900 |
| NAV | Rs 14.95 | Rs 15.05 |
Selling new units below NAV pulls the NAV down for everyone already in; redeeming below NAV lifts it for those who remain. Only when net assets are marked to market and units are priced off them does every investor get a fair price.
Why NISM asks about it
Chapter 7 (Net Asset Value, Total Expense Ratio and Pricing of Units), section 7.2.1, builds net assets from the Rs 200 crore scheme; section 7.2.2 turns it into NAV with two worked examples; section 7.2.3 shows the face-value dilution cases. The chapter's sample question asks for NAV from unit capital, accrued income and accrued expenses. Expect a computation in which a payable or a receivable is included to test whether you add or subtract it, and a conceptual question on what net assets include.
Common exam traps
- Net assets ≠ unit capital. Unit capital is units × face value; net assets add booked profits and portfolio appreciation.
- Accrued income is added and accrued expenses subtracted, whether or not cash has moved.
- Money payable for shares bought is a liability; money receivable for shares sold is an asset. Reversing them is the usual arithmetic trap.
- Unrealised appreciation is included in net assets — but it is excluded when working out distributable reserves.
- Only borrowings of up to six months for liquidity needs appear as current liabilities in the workbook's definition.
- Issuing units below NAV dilutes existing investors; redeeming below NAV benefits remaining investors.
Where this is taught
- Series V-A · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of unitsintroduced here
- Series II-A · Chapter 5: Basics of Mutual Fundsintroduced here
- Series II-B · Chapter 8: Basics of Mutual Fundsintroduced here
- Series V-D · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of unitsintroduced here
- Series X-A · Chapter 11: Mutual Fundintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Total Expense RatioThe all-in annual cost of a mutual fund scheme as a percentage of daily net assets — the base expense ratio plus brokerage, transaction cost and statutory levies — charged to the scheme, not billed to the investor.
- Accrual principleThe accounting rule that every expense and every income relating to a period is counted in that period whether or not it has been paid or received — so a scheme cannot show better profits by delaying payments.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Distributable reservesThe profits a mutual fund scheme may pay out as dividend (IDCW): accrued profits, ignoring valuation gains but deducting valuation losses — so payouts come only from real, realised profit.
- Portfolio Turnover RatioThe lower of a scheme's purchases or sales of securities in a period divided by its average net assets — a ratio of 2 means holdings are kept, on average, for about six months.
- Fair valuation principlesSEBI's ten principles requiring a mutual fund to value its holdings at realisable value, in good faith, under Board-approved and disclosed policies, so every investor entering or leaving gets a fair price.
- UnitholderA mutual fund investor, represented by the number of units held, who owns a proportional share of the scheme's assets and shares in its profits or losses accordingly.
- Non-traded securityA security (other than money market and debt) not traded on any stock exchange for thirty days before the valuation date, which the AMC must then value in good faith rather than at a market price.
- Potential Risk Class (PRC) matrixSEBI's grid for classifying a debt scheme by its maximum interest rate risk (Macaulay Duration) and maximum credit risk (Credit Risk Value), disclosed so investors know the ceiling the fund manager may take.
- Realised gainA gain a mutual fund scheme has actually banked by selling the security, as against a valuation gain, which sits in the NAV on paper and may never turn into money at all.