The value at which you get to buy and sell a single mutual fund unit is called the net asset value (NAV). While the equity and debt markets dictate NAV movement, fund charges also have an impact.
The NAV of a scheme shows how much each unit is worth at any point in time. It tells you the market value of the underlying securities, on a per unit basis.
The fund house first ascertains the total value of its assets, and then deducts liabilities, such as scheme expenses, which includes expenses it incurs to run the fund. Funds are also allowed 5 basis points for exit loads charges (those that charge exit loads) and 30 basis points to incentivise expansion of funds beyond the top 30 towns.
These are chargeable on daily basis, and include, fund management charges, commission, audit fees, and so on. The resultant figure has to be divided by the total number of units to arrive at the price per unit, called NAV.
In a unit-linked insurance plan (Ulip), certain costs are bundled in the NAV. Insurer's benefit illustration shows how much you will earn before, and after, expenses, assuming a return of maximum 8% and minimum 4%. This difference is due to fund management charges, premium allocation charges that the Ulip levies, and the policy administration charges. There is also a mortality charge every month, but this does not reduce the NAV. It gets deducted by extinguishing your units; your NAV remains the same. Policy administration charge, fund management charge, and premium allocation charge will add up to the difference between the gross yield and net yield, which cannot exceed 3% for policies with term less than or equal to 10 years and 2.25% for policies with term above 10 years.
The bottomline is this: While a mutual fund scheme’s NAV factors in all the costs, a Ulip’s NAV takes into account only the fund management charge. The other changes in a Ulip are funded by units or from the premium.