The net asset value of an investment fund is the net value of its assets less its liabilities divided by the number of shares outstanding. NAV is the price at which the shares of funds registered with the U.S. Securities and Exchange Commission (SEC) are exchanged. It is most typically used in the context of a mutual fund or an exchange-traded fund (ETF).

The difference between assets and liabilities for firms and business entities is known as the net assets, net worth, or capital of the company. The word NAV refers to the value and pricing of mutual funds, which is calculated by dividing the difference between assets and liabilities by the number of shares held by investors.

The fund’s NAV indicates a “per-share” value of the fund, making it easier to value and transact fund shares.

NAV is frequently close to or equal to a company’s book value per share. Companies with excellent growth prospects are generally valued higher than their NAV. To identify undervalued or overvalued investments in closed-end funds, NAV is commonly compared to the stock price (market value per share).

Mutual funds raise money from a large number of investors and then invest it in securities such as stocks, bonds, and money market instruments. Each investor receives a certain number of shares in proportion to the amount invested. The price of each share is determined by the NAV.

Unlike a stock, whose price movements are posted throughout the day, mutual fund pricing is based on end-of-day methodology based on the activity of the fund’s securities. A mutual fund’s managers compute the closing price of all securities in its portfolio at the conclusion of the trading day, add the value of any extra assets, account for liabilities, and calculate NAV based on the number of outstanding shares.

NAV in Closed-End Funds vs. Open-End Funds

An open-end fund can issue an unlimited number of shares, does not trade on exchanges, and is priced at their NAV each day at the close of trading. The majority of mutual funds, including those in 401k plans, are open-end funds.

Closed-end funds are traded like securities on a stock exchange and can trade at a price that is not equal to their NAV. ETFs move similarly to stocks, and their market value may fluctuate from their NAV.

This creates attractive trading chances for active ETF traders who are able to identify timely possibilities. ETFs, like mutual funds, calculate their NAV daily at market close for reporting purposes, but they also calculate and disseminate intra-day NAV many times per minute.

NAV and Fund Performance

Fund investors frequently attempt to evaluate mutual fund performance based on NAV differentials between two dates. An investor can use the difference between the NAV on January 1 and the NAV on December 31 to measure the fund’s performance. However, changes in NAV between two dates do not accurately represent mutual fund performance.

Mutual funds typically distribute all of their earnings, such as dividends and interest, to its shareholders. Furthermore, mutual funds are required to transfer the accumulated realized capital gains to shareholders.

As these two components, income and profits, are paid out on a regular basis, the NAV drops. As a result, while a mutual fund investor generates income and returns, these gains are not represented in absolute NAV values when comparing two dates.

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The yearly total return, which is the actual rate of return of an investment or a pool of investments over a certain evaluation period, is a credible indicator of mutual fund performance. Investors and analysts frequently consider compounded annual growth rate (CAGR), which represents the average yearly growth rate of an investment over a longer time period than one year.

Assume a mutual fund has a total investment of $100 million in various assets, which is computed based on the day’s closing prices for each asset.

It also has $7 million in cash and cash equivalents and $4 million in total receivables on hand. The day’s earnings total $75,000 dollars. The fund’s short-term liabilities are $13 million, and its long-term liabilities are $2 million.

The day’s expenses total $10,000. The fund has 5 million shares in circulation. The NAV is calculated using the above formula:

NAV = [($100,000,000 + $7,000,000 + $4,000,000 + $75,000) – ($13,000,000 + $2,000,000 + $10,000)] / 5,000,000 = ($111,075,000 – $15,010,000) / 5,000,000 = $19.21

For the given day, the mutual fund shares will be traded at $19.21 per share.

Here is another example:

An investment firm manages a mutual fund and would like to calculate the net asset value for a single share. The investment firm is given the following information regarding its mutual fund:

• Value of securities in the portfolio: $75 million (based on end of day closing prices)
• Cash and cash equivalents of $15 million
• Accrued income for the day of $24 million
• Short-term liabilities of $1 million
• Long-term liabilities of $12 million
• Accrued expense for the day of $5,000
• 20 million shares outstanding

The net asset value shows the market worth of a fund. It shows a fund’s per unit market value when presented as a per-share value. The per-share value is the price at which fund units can be purchased or sold by investors.

When the value of the fund’s securities rises, so does its net asset value. When the value of the securities in the fund falls, the NAV falls as well:

• If the value of securities in the fund increases, then the NAV of the fund increases.
• If the value of the securities in the fund decreases, then the NAV of the fund decreases.

Summary

• Net asset value is the value of a fund’s assets minus any liabilities and expenses.
• The NAV (on a per-share basis) represents the price at which investors can buy or sell units of the fund.
• When the value of the securities in the fund increases, the NAV increases.
• When the value of the securities in the fund decreases, the NAV decreases.
• The NAV number alone offers no insight as to how “good” or “bad” the fund is.
• The NAV of a fund should be looked at over a timeframe to assess fund performance.