NAV Verification

How do AMC's make money other than through fund management charges and exit loads? Who is responsible for the calculation and verification of the daily NAV?
-Vineeth Kumar

The fund management charges and exit load are the only way an asset management company (AMC) earns there is no other source of income. Exit load is actually a misnomer, as the load kicks in depending on the time you stay invested in the fund. For instance, funds charge an exit load depending on the time you stay invested in a fund. These loads are capped at 4 per cent and the regulatory mechanism enforces that only up to the first one per cent goes to the AMC with the rest being re-invested in the fund.

The responsibility of calculating and verifying the NAV rests with the AMC, with scrutiny by the market regulator SEBI and compliance mechanism within the AMC to ensure the NAV is calculated correctly. There are stated and well documented mechanisms to arrive at the value of the assets in which the fund has invested in while arriving at the NAV. For instance, a high investment in a small company may not cost the fund a lot of money, however, when the fund decides to offload its stake; the market value of such a stock for want of takers may fall steeply which can impact the value of the stock. There are also ways in which illiquid securities are valued when arriving at the NAV which are all well documented and regulated. If your concern is about an AMC incorrectly arriving at the NAV; it is highly unlikely.

This article was originally published on January 27, 2012.