3. What is Net Asset Value and Assets Under Management?

Before going on further, investors need to understand the following two terms:

3.1. Assets Under Management

Assets under Management or AUM is simply the size of any Mutual Fund. Take the example of Al Meezan Investments. As of October 2018, the company reported an AUM of Rs. 83 million. In contrast, the AUM of HBL Asset Management was about Rs. 58 million. In order to understand the difference, you should know the factors that can impact AUM of any firm:

  • AUM of an Asset Management Company such as Al Meezan is a sum of AUM of each individual fund such as Meezan Cash Fund, Meezan Energy fund and so on. Therefore, the greater the number and value of managed funds, the higher the AUM of the entire AMC.
  • If more people invest in a particular fund then the AMC will get more capital or money. Therefore, increase in capital flows will increase the AUM of a fund.
  • Suppose a fund called Fund Z has invested in 4 stocks listed on PSX. Fund Z’s value is the weighted average of the value of these 4 stocks. If the price of these 4 stocks decline at the same time, Fund Z will also lose value. Therefore, the AUM of a fund depends upon the value of the underlying securities.

3.2. Net Asset Value

Stock price is the price of purchasing a share of any company. Similarly, Net Asset Value or NAV is the market price of buying a unit of a Mutual Fund. In other words, it’s the value of a single unit after all expenses and fees have been paid. It is calculated at the end of the trading day and is simply the sum of all the assets including securities and cash minus any liabilities (owed amounts) divided by the number of outstanding units or shares.

For example, Fund X has invested Rs. 10 in Stock A worth Rs. 20 per share. It has also purchased a bond that has a value of Rs. 100. The fund has not invested in any other security and so, the total value of its assets would be [(20*10) + 100] or Rs. 300. The fund owes Rs. 20 in liabilities and has 100 shares outstanding.

As a result, the NAV would be [(300 – 20)] / 100 or Rs. 2.8 per share. Now Ali is an investor who wants to invest Rs. 1000. How many units of Fund X will Ali get? Well, it can be calculated with the simple formula given below:

$$ \text{Number of units you get } ={ \text{Value of your Investment} \over \text{NAV on the day you make the purchase} } $$

Ali will get [1000 / 2.8] or approximately 357 units of Fund X.

You must be wondering if lower NAV point toward a cheaper fund and better returns? Well, not really!

Suppose Fatima has Rs. 1000 to invest. There are two options: Fund A and Fund B. Both funds have the same underlying portfolio of securities. However, Fund A has NAV of Rs. 10 and Fund B has NAV of Rs. 50. Fatima can get 100 units of Fund A or 20 units of Fund B.

After one year, both funds grow by 15%. The NAV for Fund A becomes Rs. 11.5 and NAV for Fund B becomes Rs. 57.5. The value of Fatima’s investment would be Rs. 1,150 with both Fund A and Fund B. Fatima’s returns were same despite higher NAV of Fund B.

Now consider another scenario where Fund A’s NAV changed from 109 per unit to 139 per unit and Fund B’s NAV changed from 62 to 93 per share in one year. Even though Fund A’s NAV was higher, it earned a return of only 27.5% compared to a return of 50% generated by Fund B.

The bottom line is that the change in fund’s NAV value reflects the gain or loss of a fund in a certain period. There is no relation between absolute NAV and performance results of a fund.

3.3. Management Fee

While there are numerous advantages of investing in Mutual Funds, they don’t come for free! Generally, investors have to pay two types of fees. i) Load Fee ii) Management Fee. Remember from Chapter 1 that investors are required to compensate their brokers for providing them services. Similarly, Management Fee is the cost of having your funds professionally managed by an experienced Fund Manager. Investors are required to compensate their Fund Managers for selecting securities, purchasing them, tracking their performance and maintaining the value of the portfolio.

Management Fee has to be paid regardless of the performance of the fund. Generally, in Pakistan, that Management Fee is 2% of the AUM. Suppose the size or AUM of Fund X is Rs. 1 billion and the Management Fee is 2%. This implies that unitholders will pay Rs. 20 million even if the performance of the fund was poor and it didn’t generate any positive return for the period.