NAV, Total Expense Ratio and Cut-off Timing — NISM V-A Explained

NAV, Total Expense Ratio and Pricing of Units is worth 8 marks in NISM Series V-A, and it is the closest the syllabus comes to arithmetic. It is also entirely learnable — the formulas are short and the rules are finite.

Computing NAV

NAV per unit = (Assets − Liabilities) ÷ Units outstanding

The mistake candidates make is forgetting the liabilities. A scheme holding securities worth Rs 812 crore with Rs 12 crore of accrued liabilities and 4 crore units has an NAV of (812 − 12) ÷ 4 = Rs 200, not Rs 203.

A second trap: a high or low NAV says nothing about whether a scheme is cheap or dear. A scheme at Rs 300 is not expensive relative to one at Rs 15. What matters is what the underlying portfolio returns from here.

Total Expense Ratio

The TER is what the scheme charges for running itself — management fees, registrar and transfer agent costs, marketing, audit and the rest.

Three facts that get tested:

1. It is charged to the scheme, not billed to the investor. It accrues daily inside the NAV, so the NAV you see is already net of it.
2. SEBI caps it in slabs that step down as assets grow. A larger scheme is permitted a lower percentage, so investors share in the economies of scale rather than the AMC keeping them.
3. Equity schemes are permitted a higher TER than debt schemes, because active equity management genuinely costs more than running a short-duration debt portfolio.

The practical consequence for scheme selection: between two schemes with similar portfolios and strategy, the cheaper one starts each year ahead by the difference in expenses.

Loads

An exit load is a charge on redemption, typically within a defined period from investment, designed to discourage very short holding. Entry loads are not permitted.

Loads sit outside the TER and are credited back to the scheme.

Applicable NAV — the two-condition rule

This is the highest-yield rule in the chapter. Two things together decide which day's NAV a transaction gets:

1. The time stamp on the application, against the scheme's cut-off time.
2. Whether the funds are available to the scheme.

Both must be satisfied. An application stamped comfortably before cut-off whose money only reaches the scheme the next day does not get the earlier day's NAV. Exam questions are built precisely on candidates who remember one condition and forget the other.

Time stamping is mandatory because it is the audit trail behind this rule. Learn which documents must carry it.

Work through this chapter free on ScoreSetu — the calculations are drilled with worked explanations.

A worked example

A scheme has net assets of Rs 800 crore and 4 crore units, giving an NAV of Rs 200. An investor applies for Rs 5,00,000, time stamped at 2.15 p.m. on a Tuesday, and the funds are realised the same day.

• Application before cut-off ✓
• Funds realised the same day ✓
• Applicable NAV: Tuesday's, so units allotted = 5,00,000 ÷ 200 = 2,500 units

Change one detail — funds realised Wednesday — and the answer changes with it.

Study checklist

• NAV = (assets − liabilities) ÷ units, and NAV level means nothing on its own
• TER accrues inside the NAV; slabs step down with size; equity is permitted more than debt
• Exit load discourages short holding and goes back to the scheme
• Applicable NAV needs both the time stamp and the funds
• Which documents must be time stamped

Practise the NAV and pricing questions free, then test yourself with a full-length mock.