What is the net asset value (NAV)?

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Net asset value, or NAV, represents the value of an investment fund and is calculated by adding the total value of the fund’s assets and subtracting its liabilities. Mutual funds and ETFs use net asset value to calculate the fund’s per share price.

How NAV Works

Net asset value is calculated by adding what a fund owns and subtracting what it owes. For example, if a fund has investments valued at $ 100 million and has a liability of $ 10 million, its net asset value will equal $ 90 million. In addition, if the fund has one million shares outstanding, the net asset value per share will be $ 90.

The assets and liabilities of an investment fund generally change daily, so the net asset value will change from day to day.

Mutual funds and net asset value

Mutual funds calculate their net asset value per share daily and this is the price you will pay to buy or sell shares in the fund. Mutual funds are not traded throughout the day like stocks, but rather are valued at the end of the trading day. If you buy or sell shares of the fund, you will receive the next available net asset value. Placing a trade order the day before the market closes will allow you to receive today’s NAV as the price, but orders placed after the market closes will be executed at the following day’s closing NAV.

Most mutual funds are open-ended, which means stocks are issued and redeemed directly by the fund. But another type of fund known as a closed-end fund is not required to redeem the shares of shareholders and therefore the shares of these funds cannot be traded for the net asset value. Closed-end funds sell shares in public offerings, after which the shares are traded at market prices on the stock exchanges. Shares may sell for above or below the net asset value of the fund.

ETF and NAV

ETFs have many similarities to mutual funds, but they trade more like stocks. ETFs calculate their net asset value daily, but also estimate the net asset value every 15 seconds throughout the business day. This estimate is published on several financial sites. An ETF may trade at a premium or a discount to its net asset value at any time.

Professional traders sometimes pursue trading strategies that seek to take advantage of the premium or discount of an ETF. These traders are hoping that their approach will result in the ETF trading the ETF close to its underlying value or net asset value, allowing them to make an arbitrage profit. Historical information on the premium or discount of an ETF is available in the fund prospectus.

NAV and fund performance

It may seem that comparing the evolution of a fund’s net asset value over time is a good way to calculate investment performance, but this approach ignores some key data. Funds generally distribute income such as dividends and interest to shareholders, which reduces the net asset value of a fund. Mutual funds also distribute realized capital gains, which also reduces net asset value. The examination of the change in the net asset value between two dates will not take into account these distributions.

It is best to look at the total annual return of the fund over time to better understand its overall performance. This information is available on the website of the UCI or in its prospectus.

At the end of the line

Net asset value is a fairly straightforward calculation that you’ll come across often when investing in mutual funds and ETFs. Make sure you understand how and when it was calculated for the funds you are considering, and be sure to look at the total annual return data when you compare fund performance.

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