What is Net Asset Value (NAV)?
Net Asset Value is the net value of an investment fund’s assets less its liabilities, divided by the number of shares outstanding. Widely recognized in the context of mutual funds and exchange-traded funds (ETF), NAV is the price at which the shares of these funds are traded.
Key Takeaways
- Net Asset Value is the net value of an investment fund’s assets minus its liabilities, subsequently divided by the number of shares outstanding.
- NAV serves as a per-share value calculated mainly for mutual funds or ETFs.
- NAV is calculated at the end of each trading day, based on the closing market prices of the securities within the portfolio.
Demystifying Net Asset Value (NAV)
In the realm of companies and business entities, the difference between their assets and liabilities is known as net assets, net worth, or company capital. When it comes to fund valuation and pricing, the term NAV is employed. NAV is calculated by taking the difference between assets and liabilities and dividing this by the number of shares held by investors.
The fund’s NAV represents a “per-share” valuation, simplifying the process of transacting and valuating fund shares.
NAV Formula
NAV = (Assets - Liabilities) / Total number of outstanding shares
Often, NAV is close to or equal to the book value per share of a business. Stocks of companies perceived to have high growth prospects are typically valued higher than what the simple NAV calculations might suggest. For closed-end funds, NAV is frequently compared with the stock price to spot undervalued or overvalued investments.
Mutual Funds and NAV
Mutual funds aggregate money from numerous investors to purchase a variety of securities such as stocks, bonds, and money market instruments. In return, each investor receives a number of shares proportionate to their investment.
Unlike stock prices published throughout the trading day, mutual fund prices are based on end-of-day calculations from the activity of securities within the fund.
At the end of each trading day, mutual fund managers calculate the closing price for all portfolio securities, including any additional assets minus liabilities to determine NAV based on outstanding shares.
NAV: Closed-End vs Open-End Funds
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Open-End Funds: These can issue an unlimited number of shares and are priced at the close of each trading day based on NAV. Most mutual funds in 401k plans fall within this category.
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Closed-End Funds: Listed on stock exchanges, they trade equity-like and their market values can differ from their NAV. Exchange-traded funds (ETFs) also fall into this category and present profitable trading opportunities for savvy investors. Unlike mutual funds, ETFs calculate and update their NAV multiple times per minute in real-time, even though the official NAV for reporting is determined at the day’s close.
Evaluating Fund Performance with NAV
Investors often compare the fund’s NAV between two dates to gauge performance. However, it may not provide the best representation of fund performance as each mutual fund earnings such as dividends and capital gains, resulting in a temporary drop in NAV.
A more reliable performance indicator is the annual total return, encapsulating the actual earnings over time. Additionally, the compounded annual growth rate (CAGR) is examined to understand the true annual growth rate over a period longer than one year.
NAV Calculation Example
Imagine a mutual fund with total investments worth $100 million based on that day’s closing prices.
It also has $7 million in cash and equivalents, $4 million in receivables, and $75,000 accrued income. There are also $13 million in short-term liabilities and $2 million in long-term liabilities with a further $10,000 in accrued expenses. The fund features 5 million outstanding shares. Calculated, the NAV is:
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
The trading price per share of the mutual fund on the given day will thus be $19.21.
What Is NAVPS?
The net asset value per share (NAVPS) differs slightly from a fund’s current market price. Updated once daily, it incorporates previous shares held, though trading prices of the current fund may reflect changes throughout the trading day.
Trading Timelines for NAV
NAV is calculated and reported as of a certain business date, with mutual funds executed at the NAV relevant to the trade date based on a specified cutoff time. Orders received before, say 1:30 p.m., will transact at that day’s NAV, with orders received after processing on the next business day’s NAV rate.
NAV vs. Shareholder Equity
Equity incorporates intangible assets like patents, whereas NAV considers only tangible assets.
Conclusion
Net Asset Value effectively reflects an investment fund’s net worth divided per share. Each share’s value is based on NAVPS, making NAV an invaluable measure for gauging fund performance effectively and facilitating peer comparison between open and closed-end funds.
Related Terms: Book Value, Total Return, Compounded Annual Growth Rate, Capital Gains.
References
- U.S. Securities and Exchange Commission. “Net Asset Value”.
- U.S. Securities and Exchange Commission. “Mutual Funds and Exchange-Traded Funds (ETFs) – A Guide for Investors”.
- Financial Industry Regulatory Authority. “Opening Up About Closed-End Funds”.
- U.S. Securities and Exchange Commission. “Mutual Funds and ETFs: A Guide for Investors”. Page 22.
