Asset formula

What is the net asset value (NAV)?

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 price per share.

How NAV Works

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

The formula for a fund’s net asset value looks like this:

NAV = (Assets – Liabilities) / Total outstanding shares

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 of 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 in the fund, you will receive the next available NAV price. Placing a trade order the day before the market close will allow you to receive the day’s net asset value as the price, but orders placed after the market close will be executed at the following day’s closing net asset value.

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

ETFs and NAVs

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

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

NAV and fund performance

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

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

At the end of the line

Net asset value is a fairly simple calculation that you will encounter often when investing in mutual funds and ETFs. Make sure you understand how and when it was calculated for the funds you’re considering, and be sure to review total annual return data when comparing fund performance.

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