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Blockchain-based Net Asset Value (NAV) calculation for Mutual Funds


Author: Francesco de Benedittis


Blockchain emerged as a disruptive technology for various fintech areas. Traditional financial services such as the Asset Management industry can use this blockchain-based architecture for mutual fund management taking advantage of features like distributed ledger, immutability, smart contracts, amongst others. We will discuss the architecture of a mutual fund system to share the Net Asset Values of mutual funds and the last traded prices of securities. The Hyperledger project is an open-source model that can be cost-effective for the stakeholders. The proposed model involves stakeholders such as the data feed provider, regulator, registrar, and transfer agents, and the asset management company. 


Asset Management Companies pool investor funds and manage the capital by taking investment decisions related to various capital assets such as equity, bond, and debt instruments, real estate, and commodities. Mutual Funds are popular investment tools that carry several advantages over other financial investments. Asset diversification, low costs, managed by professional fund managers, liquidity are some of the attractive features of the mutual fund over investing directly in securities. Increased use of fintech, such as Artificial Intelligence and Blockchain,is seen for making better decisions, achieve higher performance and optimal use of information technology infrastructure. 


The Net Asset Value (NAV) represents the value of one unit of a scheme. It is the difference between the total value of assets in the portfolio of the fund after deducting all the liabilities incurred in fund management and dividing it by the number of units issued to investors. The NAV is calculated in-house by the Asset Management Company or outsourced to an independent accountancy firm. The value of a scheme changes during the transaction day because of both scheme-specific variables (such as price changes of underlying securities) and macro-economic variables. Funds usually calculate the NAV after the market closes for the day by taking into account the closing price of the securities that the fund holds. To make the system robust and straightforward, is been proposed a blockchain-based system that will not only eliminate some of these systems and make the process flow smoother and straightforward, but also make it immutable, transparent, decentralized and secure. 


The proposed model will use a blockchain network for the Data Feed Provider (DFP) to publish stock-exchange data feeds, which typically contains information such as the name of the security, last traded price, amongst others. The Asset Management Company uses this data to calculate the Net Asset Values (NAV) of its funds and post them on the same blockchain network. The main advantage with this setup is that it uses the distributed ledger concepts which are at the core of the blockchain design. The ledger maintains a record of the transactions and it is decentralized, meaning that transactions are being stored across all the members of the network. Commercial grade transaction systems require real-time accounting, continuous monitoring, and permission management. If properly set up, a blockchain infrastructure has the potential of facilitating and securing these procedures. 


Hyperledger Fabric, as the concrete implementation of what is represented by the aforementioned hyperledger project, has been used to setup the blockchain network for this research. The blockchain network will assist in the dissemination of financial security data that is essential for the computation of the NAV scheme. Hyperledger Fabric is an open-source enterprise-grade permissioned distributed ledger technology (DLT) platform. A DLT platform that is permissioned is suitable because the participants are untrusted. For example, there may be participants in the same network who are competitors, and therefore cannot be fully trusted. Though the current model available is limited to four organizations with one node each, Hyperledger Fabric can scale up to 26 nodes.  


The current model limits to a single peer node per organization that connects and communicates with the larger blockchain. The organization node, in turn, can have internal connectivity with other nodes of the organization, thereby increasing the blockchain scalability and resiliency. Increased peers can reduce system outage and network downtimes. Some of these peers could further host a copy of the smart contract. In such a setup, the possibility of leader peers take up the responsibility of distributing transactions to other peers in the organization can be explored. 


Blockchain applications are making increased inroads into fintech areas. The system shares the last traded prices of instruments, computes the latest net asset values of various mutual fund schemes, and distributes it to the stakeholders using the blockchain network. The system shows several advantages such as efficient data transfer and sharing between stakeholders, keeping the information provided unchanged.



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