How is a Mutual Fund’s Net Asset Value (NAV) Determined?

A New Year has provided you with a new career opportunity and the benefits your company is offering are amazing. Aside from health, dental, paid vacation and holidays, they offer 401k plan where they match your investments. After a couple hours of orientation you are off to your desk and plan on spending a couple of minutes deciding on your mutual fund choices for your investments. As you are reading each prospectus you stumble across the term Net Asset Value (NAV) and really have no idea how that should affect your decisions.

The term NAV is often used in describing collective investment schemes and it describes the value of an entity’s assets less the value of its liabilities. The mutual fund managers calculate the net asset value. They total up the value of all assets in the fund’s portfolio and divide that figure by the number of fund shares outstanding. NAV is calculated because the goal is to show profit for their clients.

Mutual funds are considered open-end investments and not traded on the free market. Mutual funds are redeemed directly between the fund and the investor. The NAV is used to set the price of those shares at the time when the investor subscribes for the Mutual Fund or withdraws from the investment. This can occur at any time with a mutual fund.

A net asset value determines the price per share for a mutual fund. ┬áThe funds’ per-share dollar amount is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. When choosing to partake in a mutual fund, make sure to focus in on that area of the prospectus carefully so you can make an educated choice.