What Does the Net Asset Value (NAV) of a Fund Mean?

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Updated on Tuesday, February 12, 2019

Mutual funds and exchange-traded funds (ETFs) provide investors with the opportunity to put their money in a professionally managed fund. Like any investment, it pays for investors to become as knowledgeable as possible about how funds work, including understanding the terminology. One key term that beginning fund investors should learn more about is net asset value, or NAV.

What is net asset value?

Simply defined, NAV is the fund’s total assets minus any liabilities. Mutual funds calculate the fund’s NAV daily after the close of the market. The fund’s NAV is the price of each share of the fund.

The types of securities where NAV calculation is required include:

  • Mutual funds (open-end)
  • ETFs
  • Closed-end funds
  • Unit Investment Trusts (UITs)

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How to calculate NAV

A fund’s net asset value is calculated by taking the total assets of the fund and subtracting any liabilities. This number is then divided by the total number of outstanding fund shares to find the NAV per share.

NAV = (total fund assets – liabilities) / number of outstanding fund shares

Here’s an example of how a mutual fund NAV calculation works for a hypothetical fund.

Fund XYZ has total net assets of $100,000,000 (total assets less any liabilities). The fund has a total of 5,000,000 shares. Dividing the $100,000,000 in net assets by the 5,000,000 shares would yield a NAV per share for the fund of $20.00.

Mutual fund companies perform this calculation at the end of each day that the markets are open.

Does the NAV matter to investors?

Knowing how a mutual fund’s NAV is calculated is important to understand how mutual funds work, but in reality, it’s a rather meaningless number when you’re evaluating whether or not to invest in a given mutual fund. Typically, an investor would look at the fund’s total returns. If you’re researching more than one fund, a comparison might better be made on relative returns or comparative expenses. Comparing the NAVs of one or more funds would not yield anything of value.

The NAV for an ETF or closed-end fund is a more meaningful number. These funds are traded continually on the stock exchange while it’s open. The price at which these securities trade can be at, above or below the fund’s NAV. A fund trading above its NAV trades at a premium. In other words, if the fund is trading at a price that is 10% above its NAV, you could say that investors are paying $1.10 for one dollar’s worth of assets.

The same holds for a fund selling below its NAV. If a fund is selling at a discount to its NAV, it could be said that an investor is paying less than $1.00 for a dollar’s worth of assets.

Mutual fund NAV vs. total return

The NAV of a mutual fund doesn’t tell investors anything about the fund’s performance; it is strictly a calculation of the fund’s value. Unlike the share price of a stock, the NAV per share is based upon an ever-changing number of shares where an open-ended mutual fund is concerned.

New shares of a fund are created when an investor buys additional shares. As long as the fund is open to new investors, there are no additional restrictions on the creation of new shares. Also, when a fund makes a distribution, the NAV decreases for two reasons. First, some shareholders will take the distributions in cash, reducing the fund’s total assets. Second, other shareholders will reinvest the distributions into new shares. While this will not reduce the fund’s total assets, it will result in a larger number of shares, serving to reduce the NAV per share.

All of this can be difficult for most investors to follow and make sense of. Even then, drawing a conclusion about the change in a fund’s NAV can be difficult.

That’s where a fund’s total return can be useful. Total return captures the capital appreciation, capital gains and dividends earned by holdings of the fund (in the case of a mutual fund that invests in stocks). A bond fund will likely earn more of its total return from interest and dividends than from the fund’s underlying holdings — though capital gains can come into play here as well.

Total return is the most important measurement of performance for a mutual fund, since returns earned by investors come from sources beyond capital appreciation. The contribution of dividends to the total return of the S&P 500 over time has been around 40% in the aggregate. The impact of dividends on total return will, of course, vary widely by individual stock and even the industry the company is in.

Mutual fund total returns are widely available from Morningstar, Zacks and other sources. It is an easy way for investors to track how their fund is doing. The most relevant comparison is among mutual funds in the same asset class or category.

For example, comparing the performance of two funds in Morningstar’s large-blend category is more meaningful than comparing the performance of a large-blend fund to a small-cap foreign stock fund. The factors influencing performance and risk would be drastically different for these two types of funds.

Bottom line

Understanding how a mutual fund’s net asset value is calculated is important for investors who are gaining an understanding of how mutual funds work. However, it is a relatively unimportant metric in tracking the results of their fund, where a metric like total return would probably work better.

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