Net Asset Value Explained

What is net asset value and what does it mean for funds?

The term “net asset value” is often used to describe collective investment vehicles. NAV describes the value of an entity’s assets less the value of its liabilities. Fund managers calculate NAV by totaling up the value of all assets in the fund’s portfolio and dividing that figure by the number of fund shares outstanding. 

NAV is also an important figure for investors because it’s the price that mutual funds registered with the Securities and Exchange Commission trade on the markets on a given day. Moreover, net asset value reveals to the world how much the fund owns less its expenses. This is similar to the stockholders’ equity you see on a company’s balance sheet. But whereas equity points more to the liquidation value, net asset value calculates an asset’s value without regard to its liquidation status. 

Read on to learn more about net asset value and why it’s important:

How Do You Calculate Net Asset Value?

As mentioned previously, net asset value is calculated as follows:

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  • NAV = Total Assets minus Total Liabilities
  • NAV Per Share = NAV ÷ Number of shares outstanding 

In other words, the 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. 

For example, suppose a mutual fund holds $500 million in securities while also holding $20 million in cash and another $5 million in receivables. It also has $75 million in liabilities. The net asset value would be calculated this way:

  • ($500 million + $20 million + 5 million) – $75 million = $450 million

Now that you know the NAV, suppose the mutual fund holds 10 million shares. You can determine the NAV per share with the following calculation:

  • $450 million ÷ 10 million shares = $45 NAV per share

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How Is Net Asset Value Used?

Investors recognize the net asset value per share as the share price for a given security, and many types of securities utilize the net asset value. However, the role it plays depends on the type of investment vehicle:

Mutual Funds

Mutual funds are considered open-end investments and not traded on the stock market. They are redeemed directly between the fund and the investor. The net asset value is used to set the price of those shares at the time when the investor buys shares in the mutual fund, or withdraws from it. These transactions can occur at any time with a mutual fund. However, asset managers typically calculate this figure at the end of a trading day to determine the current net asset value per share price they quote to the public. 

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A net asset value determines the price per share for a mutual fund. When choosing to invest in a mutual fund, make sure to focus on this area of the prospectus carefully so you can make an educated choice.

Also See: Mutual Funds — Everything You Need To Know

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Exchange-Traded Funds

Exchange-traded funds pool investments such as stocks and bonds into one asset, much like a mutual fund. They also calculate the net asset value in the same manner as a mutual fund. 

However, unlike mutual funds, ETFs trade on a stock exchange. Hence, the price quoted from a stock exchange at any given moment can differ from the net asset value.

Real Estate Investment Trusts

REITs are another type of fund that trade like stocks on stock exchanges, though they differ from mutual funds and ETFs by the assets they own. REITs either hold real estate or the mortgages that finance real estate. They also differ in that they must distribute at least 90% of their taxable income in the form of dividends. 

Like mutual funds and ETFs, REITs often employ net asset value in determining an appropriate value for the REIT. Since REITs trade on the stock market, they also see the same types of fluctuations that ETFs experience. 

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Related: Investing for Beginners — How To Invest In Real Estate

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What Is the Difference Between Net Asset Value and Market Price?

The market value of an asset refers to the price at which an actively traded security can be bought or sold. During the trading day, the price of a stock often remains in a constant state of flux due to numerous factors. This means that a quoted stock price can — and usually does — change continuously during the trading day. 

The net asset value is, of course, based on asset values. If the fund owns stocks, its net asset value can still change constantly since the underlying stocks change in value. And in the case of ETFs, since the ETF is itself a stock it will move up or down based on conditions within the market. The net asset value can still serve as a stabilizing influence, however. Since the underlying value of the ETF is based on the net asset value calculated at the end of every day, the market value of the ETF will probably not stray significantly from the NAV.

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What Are the Limitations of Net Asset Value?

Despite the benefits of understanding net asset value, this calculation also presents limitations. As mentioned earlier, the price at which an asset trades on the market might not always reflect the NAV. In cases where the market price deviates significantly from the net asset value, for example, this can bring excessive buying or selling in a security as traders seek to profit from the differential. 

Moreover, NAV does not account for dividend distributions. REITs face a legal obligation to pay most of their net income to shareholders. Many mutual funds and ETFs also distribute a significant percentage of their income in the same manner. Not only does this reduce the net asset value, but it might also make a fund’s return appear lower. 

Although NAV doesn’t measure returns well, it can provide a snapshot of the value of a current asset. By understanding the assets and liabilities of a fund, you have a critical metric in determining whether a fund is a suitable investment.

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About the Author

Will Healy

Will Healy is a freelance business and financial writer based in the Dallas area. He has covered a variety of topics, such as stocks, real estate, insurance, personal finance and macroeconomics. In addition to GOBankingRates, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance and Seeking Alpha.

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