Net Asset Value (NAV): Definition, Formula, Example, and Uses

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. Most commonly used in the context of a mutual fund or an exchange-traded fund (ETF), NAV is the price at which the shares of the funds registered with the U.S. Securities and Exchange Commission (SEC) are traded.

Understanding Net Asset Value (NAV)

For companies and business entities, the difference between the assets and the liabilities is known as the net assets or the net worth or the capital of the company. The term NAV is applied to the fund valuation and pricing, which is arrived at by dividing the difference between assets and liabilities by the number of shares held by the investors.

The fund’s NAV represents a “per-share” value of the fund, which makes it easier to be used for valuing and transacting the fund shares.

NAV is often close to or equal to the book value per share of a business. Companies considered to have high growth prospects are traditionally valued more than NAV might suggest. For closed-end funds, NAV is most frequently compared to the stock price (market value per share) to find undervalued or overvalued investments.

Mutual Funds and NAV

Mutual funds collect money from a large number of investors, then use that money to invest in securities, such as stocks, bonds, and money market instruments. Each investor gets a specified number of shares in proportion to their invested amount. The pricing of each share is based on NAV.

Unlike a stock whose price changes are posted throughout the day, mutual fund pricing is based on the end-of-the-day methodology based on the activity of the securities in the fund.

At the end of the trading day, managers of a mutual fund compute the closing price of all the securities within its portfolio, adds the value of any additional assets, accounts for liabilities, and calculate NAV based on the number of outstanding shares.

NAV in Closed-End Funds vs. Open-End Funds

An open-end fund can issue an unlimited number of shares, does not trade on exchanges, and is priced each day at the close of trading at their NAV price. Most mutual funds, such as those in 401k plans, are open-end funds.

Closed-end funds are listed on a stock exchange, trade similarly to securities, and can trade at a price that's not equal to their NAV. ETFs trade like stocks and their market value can differ from their actual NAV.

This allows for profitable trading opportunities for active ETF traders who can spot timely opportunities. Similar to mutual funds, ETFs also calculate their NAV daily at the close of the market for reporting purposes but also calculate and disseminate intra-day NAV multiple times per minute in real-time.

NAV and Fund Performance

Fund investors often try to assess the performance of a mutual fund based on their NAV differentials between two dates. An investor may compare the NAV on January 1 to the NAV on December 31, and see the difference in the two values as a gauge of the fund’s performance. However, changes in NAV between two dates aren’t the best representation of mutual fund performance.

Mutual funds commonly pay out all of their income like dividends and interest earned to their shareholders. Additionally, mutual funds are also obligated to distribute the accumulated realized capital gains to the shareholders.

As these two components, income, and gains, are regularly paid out, the NAV decreases accordingly. Therefore, though a mutual fund investor earns income and returns, individual earnings are not reflected in the absolute NAV values when compared between two dates.

A reliable measure of mutual fund performance is the annual total return, which is the actual rate of return of an investment or a pool of investments over a given evaluation period. Investors and analysts also look at compounded annual growth rate (CAGR), which represents the mean annual growth rate of an investment over a specified period longer than one year.

Example of NAV Calculation

Assume that a mutual fund has $100 million worth of total investments in different securities, which is calculated based on the day's closing prices for each asset.

It also has $7 million of cash and cash equivalents on hand, as well as $4 million in total receivables. Accrued income for the day is $75,000. The fund has $13 million in short-term liabilities and $2 million in long-term liabilities.

Accrued expenses for the day are $10,000. The fund has 5 million shares outstanding. Using the above formula, the NAV is calculated as:

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

For the given day, the mutual fund shares will be traded at $19.21 per share.

The Bottom Line

Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the number of shares outstanding. Funds can be open or closed and the pricing of each share is based on NAV. The price of each fund share is reflected as the NAVPS or per-share value.