NAV, total expense ratio and pricing of units

The NAV is the number the investor sees every day, and the expense ratio is the number that quietly decides how much of the return reaches them. This chapter is calculation-heavy and the exam rewards fluency: compute a NAV, apply an exit load, work out which day's NAV applies. Expect at least five questions.

Computing the NAV

At the end of every business day the scheme's holdings are valued at market prices (mark to market), accrued income such as interest and dividend is added, accrued expenses and other liabilities are deducted, and the result is divided by the units outstanding.

NAV is declared to at least two decimal places, and to four decimal places for debt, liquid, index and ETF schemes. Equity securities are valued at the closing price on the principal exchange; debt securities are valued using prices from SEBI-recognised valuation agencies; unquoted or thinly traded securities follow SEBI's valuation norms. Any gain or loss, realised or unrealised, flows into the NAV. NAV is published on the AMC and AMFI websites by 11 pm the same day.

Total expense ratio

The total expense ratio (TER) is the annual percentage of a scheme's average daily net assets charged to the scheme for running it. It covers the investment management fee of the AMC, trustee fees, RTA and custodian fees, audit fees, marketing and distribution expenses including trail commission, and other operating costs. It is accrued daily, so each day's NAV is already net of that day's slice of expenses. A 2% TER on ₹500 crore is ₹10 crore a year, or about ₹2.74 lakh deducted from the scheme every day.

SEBI caps the TER in slabs that fall as AUM rises, so that economies of scale reach investors. For actively managed open-ended schemes:

• Equity-oriented schemes: 2.25% on the first ₹500 crore, 2.00% on the next ₹250 crore, 1.75% on the next ₹1,250 crore, 1.60% on the next ₹3,000 crore, 1.50% on the next ₹5,000 crore, then reducing by 0.05% for every additional ₹5,000 crore, with 1.05% on assets above ₹50,000 crore.
• Other than equity-oriented schemes (debt, most hybrids): 2.00% on the first ₹500 crore, 1.75%, 1.50%, 1.35%, 1.25% on the corresponding slabs, reducing by 0.05% per ₹5,000 crore, with 0.80% above ₹50,000 crore.
• Index funds and ETFs: maximum 1.00%. Fund of funds: up to 2.25% for those investing in actively managed equity schemes, 2.00% for other actively managed underlying schemes and 1.00% for those investing in passive schemes, including the underlying schemes' expenses.
• Close-ended and interval schemes: 1.25% (equity) and 1.00% (other).

Over and above these limits, the scheme may charge: up to 0.05% (5 basis points) extra if the scheme has an exit load; the additional expense for B-30 inflows, as and when notified; and GST on the investment management and advisory fee. Brokerage and transaction costs are allowed within limits of 12 basis points for cash market trades and 5 basis points for derivatives. The direct plan has a lower TER because it excludes distribution expenses and commission, and nothing else. Any increase in TER must be intimated to investors at least 3 working days in advance, and the daily TER is published on the website.

The effect compounds. On ₹1,00,000 growing at 12% a year before costs, a 2% TER leaves ₹2,59,374 after 10 years (10% net); a 0.75% TER leaves about ₹2,90,400 (11.25% net). The ₹31,000 gap is why TER is a selection criterion, not a footnote.

Loads and the repurchase price

A load is a charge on the investor at the time of a transaction. SEBI abolished entry loads in August 2009, so the sale price of a unit is simply the NAV (plus stamp duty on the amount invested). An exit load may be charged on redemption, typically for exits within a stated period, say 1% if redeemed within 365 days. Since 2012 the exit load is credited to the scheme, not kept by the AMC, so that the remaining investors are compensated for the cost of early exits. Exit load must be the same for all investors in a plan and cannot be charged on units allotted through IDCW reinvestment or bonus.

Redeeming 1,000 units at a NAV of ₹52.40 with a 1% exit load gives ₹52.40 × 0.99 × 1,000 = ₹51,876. A switch is a redemption from one scheme and a purchase in another, so the source scheme's exit load applies, while a switch between the growth and IDCW options of the same plan, or from regular to direct within a scheme, follows the exit load terms set out in that scheme's SID.

Cut-off times and which NAV applies

SEBI fixes cut-off times that decide which day's NAV an investor gets. For equity, hybrid and most debt schemes the cut-off is 3:00 pm. For liquid and overnight schemes the purchase cut-off is 1:30 pm, and the redemption cut-off is 3:00 pm.

For purchases and switch-ins, since 1 February 2021 the rule for all schemes and all amounts is that the applicable NAV is the NAV of the day on which the money is realised (credited to the scheme's bank account) before the cut-off, provided the application was also received before the cut-off. An application at 2 pm on Monday whose funds are credited only on Tuesday at 11 am gets Tuesday's NAV. For liquid and overnight schemes, if the application and funds are both in before 1:30 pm, the investor gets the previous day's NAV, since these schemes' NAV is computed for the day's close; funds realised after the cut-off get the NAV of the day before the next business day.

For redemptions and switch-outs, what matters is the time the request is received: before 3 pm, the same day's closing NAV; after 3 pm, the next business day's NAV. For liquid and overnight schemes, a redemption received before 3 pm gets the NAV of the day immediately preceding the next business day, and after 3 pm the NAV of the next business day.

All applications are time-stamped at the official point of acceptance: an AMC or RTA office, or electronically on a platform. SIP instalments follow the same funds-realisation rule, and a switch is a redemption at the source scheme's NAV on the request day and a purchase in the target scheme on the day the proceeds reach it. The distributor's practical advice to clients: transfer the money the same morning, and do not expect the day's NAV if the cheque clears tomorrow.