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Fund Operations & NAV
NAV validation & tolerance checks
Learning Outcome
5
Ensure accurate and reliable NAV reporting.
4
Handle and resolve NAV breaches before publication.
3
Set tolerance limits to flag unusual NAV movements.
2
Ensure NAV accuracy before publication.
1
Explain the NAV formula and identify its key components.
The NAV Formula
The NAV formula gives the per-unit value of a fund on any given day. It is the number that all validation and tolerance checks are performed on.
NAV = (Total Assets − Total Liabilities) ÷ Total Outstanding Units
where:
Total Assets = Market value of all securities held + Accrued income (dividends, interest) + Other receivables + Cash & cash equivalents
Total Outstanding Units = Units held by all investors on that day.
Numerical Example:
Horizon Balanced Fund, as on 30 July 2026:
Total Assets = ₹45,90,00,000,
Total Liabilities = ₹10,00,000
Outstanding Units = 2,00,00,000.
Solution:
NAV = (₹45,90,00,000 − ₹10,00,000) ÷ 2,00,00,000
= ₹45,80,00,000 ÷ 2,00,00,000 = ₹22.90 per unit.
This ₹22.90 is the figure that now goes through validation before it is released.
Validation Checks
Validation Checks are performed before the NAV is published to ensure it is accurate and free from errors. These checks verify that the prices, calculations, and other data used in the NAV are correct.
Before publishing the ₹22.90 NAV of the Horizon Balanced Fund, the operations team:
Calculates the NAV again using a second system or independent process.
Compares the fund's daily NAV movement with the Nifty 50 to identify any unusual differences.
Confirms that the security prices match the official NSE closing prices
If all checks are correct, the NAV is published.
Tolerance Limits
A Tolerance Limit is the maximum change allowed in a fund's NAV from one day to the next without further review. If the NAV changes more than the set limit, it is flagged for investigation before being published.
Horizon Balanced Fund has a tolerance limit of ±1.5%.
-
Previous day's NAV: ₹22.50
-
Today's calculated NAV: ₹22.90
Calculate the change in NAV
= 22.90- 22.50
____________ X 100 = 1.78%
22.50
Decision
Since 1.78% is greater than 1.5%, the NAV is flagged for review and cannot be published until the reason for the change is verified.
Compare with the tolerance limit
-
Actual NAV change: 1.78%
-
Tolerance limit: 1.5%
Exception Handling
Exception Handling is the process followed when the NAV exceeds the tolerance limit. The operations team checks whether the change is due to an error or a genuine market movement.
The Horizon Balanced Fund's NAV increased by 1.78%, which is above the 1.5% tolerance limit.
Investigate the reason
The operations team checks:
-
Whether security prices are correct.
-
Whether any income or expense has been missed or recorded twice.
-
Whether there are any data or system errors.
Verify the result
The team finds that:
-
All prices are correct.
-
There are no calculation or data errors.
-
The increase is due to a rise in banking stocks and a dividend received by the fund.
Approve the NAV
Since the change is genuine, the reason is documented, an authorized reviewer approves it, and the ₹22.90 NAV is published.
Summary
5
Ensure only accurate, verified NAV is released.
4
Exception Handling identifies NAV errors or market movements.
3
Tolerance Limits flag unusual NAV changes for review.
2
Validation Checks ensure accurate NAV calculations.
1
NAV = (Total Assets − Total Liabilities) ÷ Outstanding Units
Quiz
Which formula is used to calculate a fund's NAV?
A. Total Assets ÷ Total Liabilitie
B. (Total Assets − Total Liabilities) ÷ Outstanding Units
C. Total Assets × Outstanding Units
D. Total Liabilities ÷ Outstanding Units
Quiz-Answer
Which formula is used to calculate a fund's NAV?
A. Total Assets ÷ Total Liabilitie
B. (Total Assets − Total Liabilities) ÷ Outstanding Units
C. Total Assets × Outstanding Units
D. Total Liabilities ÷ Outstanding Units
IB11 - Fixed Income Portfolio Strategy : NAV validation & tolerance checks
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