6B.2 NAV: how a unit is priced

Computing the NAV#

Daily accrual of fees The expense ratio $c$ is an annual rate, but it is charged daily as a liability. If $NA_t^{\text{pre}}$ is net assets before today's charge,

The fee never appears as a separate deduction from your account. It is already inside every NAV you see, which is why a fund's published return is net of its expense ratio and why the expense ratio cannot be "avoided" by timing purchases. Over a year of daily accruals the factor is $(1 - c/365)^{365} \approx e^{-c}$, so a gross return $r$ becomes approximately $r - c$.

Cut-off times and forward pricing#

Cut-off times and the applicable NAV (checked 6 Nov 2026; verify in the scheme's SID before relying on a time).

• Purchases, all schemes except liquid and overnight. If the application is received before the 3:00 pm cut-off and the money is available for utilisation by the scheme before the cut-off, the units are allotted at that day's closing NAV. Otherwise the NAV of the business day on which the funds become available applies. This "realisation of funds" rule was extended to purchases of every amount by SEBI's circular of 17 Sep 2020 (SEBI/HO/IMD/DF2/CIR/P/2020/175), effective for applications from 1 Feb 2021¹.
• Liquid and overnight schemes, purchases. Cut-off 1:30 pm; the applicable NAV is that of the day before the day on which funds are available, provided application and funds arrive by the cut-off [S]. The previous-day NAV removes the one-day accrual that a late investor would otherwise collect free.
• Redemptions. Requests before 3:00 pm get that day's NAV; later requests get the next business day's. For overnight schemes, a SEBI circular of 22 Apr 2025 (SEBI/HO/IMD/PoD2/P/CIR/2025/56) set a 7:00 pm cut-off for online redemption requests from 1 Jun 2025².
• Redemption proceeds must be transferred within the period SEBI specifies; if late, the AMC pays interest at 15% a year for the delay (Regulation 46(2)) [V].

The whole design is forward pricing: at the moment you commit, you do not know the NAV you will get, because it is struck from prices at or after the cut-off.

Stale prices transfer wealth#

Proof

(a) A purchase of $S$ at $p = v$ adds $S$ to assets and $S/v$ units: the new NAV is $(V + S)/(N + S/v) = v(N + S/v)/(N + S/v) = v$. A redemption of $u$ units pays $uv$: $(V - uv)/(N - u) = v$. (b) The buyer receives $S/v_s = fN$ units. After the purchase, true assets are $Nv_s(1 + \varepsilon) + S = Nv_s(1 + \varepsilon + f)$ and units are $N(1 + f)$, so the true NAV is $v' = v_s(1 + \varepsilon + f)/(1 + f)$. The buyer's units are worth $fNv' = fNv_s(1 + \varepsilon + f)/(1+f)$, against $S = fNv_s$ paid: the gain is $fNv_s\,\varepsilon/(1 + f) = S\varepsilon/(1+f)$. The old holders had $Nv_s(1 + \varepsilon)$ and now hold $Nv' = Nv_s(1 + \varepsilon + f)/(1 + f)$; the difference is $Nv_s\big[(1+\varepsilon)(1+f) - (1 + \varepsilon + f)\big]/(1+f) = Nv_s\,\varepsilon f/(1+f) = S\varepsilon/(1+f)$. (c) The redeemer is paid $uv_s$ for units whose fair value is $uv_s(1 + \varepsilon)$: a gain of $-uv_s\varepsilon$. The remaining holders keep assets $Nv_s(1 + \varepsilon) - uv_s$ for $N - u$ units, against a fair entitlement of $(N - u)v_s(1 + \varepsilon)$; the shortfall is $uv_s(1 + \varepsilon) - uv_s = uv_s\varepsilon$, which is the redeemer's gain when $\varepsilon < 0$, and with the sign reversed when $\varepsilon > 0$.∎

Two consequences. A stale price is a free option: buy when $\varepsilon > 0$ is predictable, redeem when $\varepsilon < 0$ is predictable, and do nothing otherwise. And the cost is borne by the investors who do nothing, typically the least attentive.

Swing pricing#

Proof

Redeem $u$ units from $N$ at $p = v(1 - s)$, so $R = uv(1 - s)$. The fund sells $X = R/(1 - k)$ of securities. Remaining NAV: $\big(Nv - R/(1-k)\big)/(N - u)$. With $s = k$, $R/(1-k) = uv$ and the NAV is $(Nv - uv)/(N - u) = v$. With $s = 0$, the fund sells $uv/(1-k)$, which is $uv\,k/(1-k)$ more than the redeemers' fair share $uv$; that excess comes out of the remaining holders.∎

In India SEBI introduced a swing-pricing framework for open-ended debt schemes (other than overnight and gilt funds) by a circular of 29 Sep 2021, effective 1 Mar 2022. It applies to net outflows. In normal times the AMC decides whether to swing; in a "market dislocation" declared by SEBI (on AMFI's recommendation or its own initiative), a minimum swing factor between 1% and 2% applies to the riskier schemes, set by a grid of duration and credit risk³. 6B.10 shows why a debt fund needs it most.

Stale-price arbitrage and Indian rules#

Late trading and market timing In the United States before 2003, funds struck NAV at the 4 pm New York close, but many international funds valued Asian and European holdings at closing prices that were many hours old. When the US market rose sharply after Tokyo closed, the Japanese holdings' fair value had risen ($\varepsilon > 0$ predictably), but the NAV did not show it: Proposition 6B.2.1(b) with a known sign. Market timing exploited this by frequent round trips. Late trading, which is illegal, went further: orders placed after 4 pm received the 4 pm NAV, so the investor could see the evening's news first. Zitzewitz (2003) estimated that stale-price arbitrage in international funds earned 35–70% a year for the arbitrageurs, and that dilution of long-term holders of international funds rose from 56 bp a year (1998–99) to 114 bp (2001)⁴. 6B.12.4 has the scandal that followed.

Indian rules close both doors by design. A 3 pm cut-off with NAV struck from closing prices at 3:30 pm makes the information gap short and in the investor's future, not past; the realisation-of-funds rule stops investors from claiming today's NAV with money that arrives later; and the US holdings of Indian international funds are valued at the US close of the same day, which occurs after the Indian cut-off. (Holdings in markets that close before 3 pm IST, such as Hong Kong, leave a short window of staleness.)

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