Net Asset Value (NAV) is a key metric used to determine the value of an investment fund. It is calculated by taking the total value of the fund’s assets and subtracting its liabilities. This figure is used by mutual funds and ETFs to determine the price per share of the fund.

What is NAV and how does it work?

The net asset value (NAV) of a fund is calculated by summing the value of its assets and subtracting its liabilities. For example, if a fund’s investments are worth $100 million and it has $10 million in liabilities, the NAV would be $90 million. If the fund has one million shares outstanding, the NAV per share would be $90.

The NAV formula is:

NAV = (Assets – liabilities) / Total shares outstanding

Since a fund’s assets and liabilities can fluctuate daily, its NAV is updated regularly.

Mutual funds and NAV

Mutual funds calculate their net asset value (NAV) per share at the end of each trading day, which determines the price at which you buy or sell shares. Unlike stocks, which are traded throughout the day, mutual fund transactions are based on the NAV calculated at market close. If you place a trade order before the market closes, you’ll receive that day’s NAV. Orders placed after market close will be executed at the NAV of the following trading day.

Most mutual funds are open-end funds, meaning they issue and repurchase shares directly from investors. In contrast, closed-end funds do not repurchase shares from investors, so their shares may trade at prices above or below the NAV. Closed-end fund shares are sold through public offerings and then traded on exchanges at market prices.

Here’s a list of the top mutual funds.

ETFs and NAV

ETFs share many characteristics with mutual funds but operate more like stocks. They calculate their net asset value (NAV) daily and provide NAV estimates every 15 seconds throughout the trading day. These estimates are available on various financial websites. ETFs can trade at either a premium or a discount to their NAV at any given time.

Professional traders often employ strategies to capitalize on these premiums or discounts. Their goal is to bring the ETF’s trading price closer to its NAV, potentially earning an arbitrage profit in the process. Historical data on an ETF’s premiums and discounts can typically be found in the fund’s prospectus.

Net asset value and fund performance

Comparing a fund’s change in net asset value (NAV) over time might seem like a good way to gauge investment performance, but this method overlooks some crucial details.

Funds often distribute income such as dividends and interest to shareholders, which can reduce the NAV. Additionally, mutual funds distribute realized capital gains, which also lowers the NAV. Therefore, simply comparing the NAV between two dates doesn’t account for these distributions.

To get a more comprehensive understanding of a fund’s performance, it’s better to review its total annual return over time. This information is available on the mutual fund’s website or in its prospectus.

In Conclusion

NAV is a straightforward calculation commonly encountered when investing in mutual funds and ETFs. It’s important to understand how and when the NAV was calculated for the funds you’re considering. Additionally, when comparing fund performance, be sure to review the total annual return data for a more comprehensive assessment.