What is Net Asset Value?

We preferably use Net Asset Value for open-end mutual funds. We determine NAV by summing all the assets, subtracting them by all fund liabilities, and then dividing by the total shares outstanding. You can calculate your assets’ total worth daily at the market’s closing.

Mutual fund net asset value (NAV) represents a fund’s per share market value. It is the price at which investors buy (bid price) fund shares from a fund company and sell them (redemption price) to a fund company.

A NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio’s securities. The formula for a mutual fund’s NAV calculation is straightforward:

A fund’s NAV is calculated by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding.

Example of NAV

The NAV = (Fund Assets – Fund Liabilities) / Total shares outstanding 

Let’s take an example where a company has Fund Assets of USD 100mn and Fund Liabilities of USD 70mn. If the Total Shares Outstanding are 100,000, the NAV would be

NAV = (100mn – 70mn) / 100mn = 30 

For take another example, let’s say a mutual fund has $45 million invested in securities and $5 million in cash for total assets of $50 million. The fund has liabilities of $10 million. As a result, the fund would have a total value of $40 million.

The total value figure is important to investors because it is from here that the price per unit of a fund can be calculated. By dividing the total value of a fund by the number of outstanding units, you are left with the price per unit—the form of measurement in which NAV is usually quoted. As such, the price of a mutual fund is updated around the same time as the NAVPS.

Building on our previous example, if the fund had 4 million shares outstanding, the price-per-share value would be $40 million divided by 4 million, which equals a NAV of $10 per share.

Why is Net Asset Value important?

NAV assists investors in knowing the actual value of the assets after incorporating all the liabilities. One single number gives the value of the assets and is used vividly in the mutual fund industry. 

Components of NAV Calculation

The calculation of NAV in mutual fund involves two primary components: the market value of assets and liabilities.

1. Market Value of Assets

The assets of the mutual fund scheme involve two components:

Securities: This includes the market value of all stocks, bonds and other financial instruments held by the mutual fund scheme.

Cash and Cash Equivalents: The value of any cash or assets that can be quickly converted to cash held by the mutual funds.

2. Liabilities

Operating Expenses: These are costs incurred in managing the mutual fund. This normally includes management fees, administrative expenses etc. These expenses are directly met from the funds of the schemes. The remaining amount is treated as returns of the investors.

Other Liabilities: Any other outstanding payments or obligations on the mutual fund scheme.

After determining the market value of assets and subtracting liabilities, the resulting value is divided by the total number of outstanding units to derive the NAV in mutual fund. 

Mutual Fund NAV vs. Stock Prices

The NAV pricing system for the trading of shares of mutual funds differs significantly from that of common stocks or equities, which are issued by companies and listed on a stock exchange.

A company issues a finite number of equity shares through an initial public offering (IPO), and possibly subsequent additional offerings, which are then traded on exchanges such as the New York Stock Exchange (NYSE). The prices of stocks are set by market forces or the supply and demand for the shares. The value or pricing system for stocks is based solely on market demand.

On the other hand, a mutual fund’s value is determined by how much is invested in the fund as well as the costs to run it, and its outstanding shares. However, the NAV doesn’t provide a performance metric for the fund. Because mutual funds distribute virtually all their income and realized capital gains to fund shareholders. A mutual fund’s NAV is relatively unimportant in gauging a fund’s performance. Instead, a mutual fund is best judged by its total return, which includes how well the underlying securities have performed as well as any dividends paid.

What Does NAV Mean in Finance?

NAV stands for net asset value. In finance, it is used to evaluate the value of a firm or an investment fund by subtracting its liabilities from assets.

Where Do You Find the Net Asset Value per Share of a Mutual Fund?

The net asset value per share (NAVPS) of a fund is often reported along with its price quote with a broker or online financial portal. This value will often be close to, but slightly different from, the fund’s actual market price. NAVPS is calculated once per day, while the assets held by a fund may change in price throughout the day.

What Causes a Change in the Net Asset Value of a Mutual Fund?

When the holdings in a fund’s portfolio change, the value of the assets of the fund will also change, leading to a change in NAV. Additionally, NAV can change if the fund’s liabilities change.

Is a High NAV Good or Bad?

A high NAV indicates nothing on its own, except that the fund holds a large value of assets. What is important is to compare things on a relative basis. Such as the NAV of one growth fund to another. It is also important to compare a fund’s NAV to its market price. If the NAV is much higher than the current market price, it may signal a good buying opportunity.

Is NAV Same As Book Value (BV)?

Book value is used to evaluate the intrinsic value of a particular company. By subtracting the firm’s liabilities from its assets found on its balance sheet. This is a similar calculation to a fund’s NAV. While a fund’s assets are themselves shares of companies (in many instances).