In mutual fund, how dividend is been calculated and also NAV[ Net asset value]?

The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.

For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. Open-end funds sell and redeem their shares at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

At the end of the trading day (4 pm Eastern time), the manager will add up the closing market prices of all stocks and bonds the fund owns, which is the fund's total assets. The manager then subtracts all the liabilities (expenses of the fund). The remaining amount is net assets. Divide the net assets of the fund by the number of outstanding mutual fund shares, and you arrive at the Net Asset Value (NAV) of one share. The NAV is the amount of equity that one mutual fund share entitles its owner to.

Even though a mutual fund reports an annual expense ratio, it actually spreads the expenses out over the entire year. The fund manager does not extract the expenses from you at one time. The fund expenses are already factored into the NAV each day.

Please note that the NAV is calculated after the market closes, not in the middle of the day or at the time you placed your order. Many times the actual transaction occurs the business day after you placed your order. This is to prevent speculators from making ultra-short profits at other investors' detriment. This also brings up an interesting quandary: how does an international stock fund calculate the NAV if the European and Asian markets do not close at 4 pm Eastern time? I will not bore you with the details. In short, they estimate the NAV and then make necessary corrections the next day.

When the stocks/bonds that a fund owns pay dividends/interest, the manager passes this money on to the fund shareholders. She is required, by law, to do so. She can pay this money to you (electronic transfer to your checking account). Or, she can reinvest that money to buy more stocks/bonds on your behalf, and will issue you more mutual fund shares to represent this. In most cases, you are allowed to choose which option you want.

The SEC does not require the manager of a fund to pass along the dividends and capital gains right away. Some managers will hold onto them, unloading this money to shareholders at the end of the year. To compensate, the fund's NAV will increase slightly to account for this. This ensures that you receive your fair share (no pun intended) of the returns if you sell your fund shares before the end of the year.

This delayed distribution is sometimes desirable. Why? Distributions purchase more fund shares if you use the reinvest option. Over the years you will wind up with fund shares purchased at a wide variety of prices. In a taxable account, this can create a paperwork nightmare. When you sell your fund shares, the capital gain will be different for each lot of shares. By only paying distributions once per year, there is less "cost basis" to calculate. (One of the biggest advantages to a tax-sheltered account is that you won't have to worry about any of this.)