Net Asset Value (NAV)

Definition

Net Asset Value (NAV) is the value of an investment fund determined by subtracting its liabilities from its assets. The per-share NAV equals the fund’s NAV divided by the number of outstanding shares. Funds typically calculate NAV at the end of each trading day using closing market prices.

How NAV Works

• NAV represents the net value of a fund’s holdings and is used to price shares in mutual funds, unit investment trusts, and to report values for ETFs.
• Per-share NAV gives investors a straightforward measure of a fund’s value per unit.
• For closed-end funds and individual companies, per-share NAV (or book value per share) is often compared to market price to identify potential undervaluation or overvaluation.

Formula

• NAV = Total assets − Total liabilities
• NAV per share = (Total assets − Total liabilities) / Total outstanding shares

Example

Assume a mutual fund has:
* Investments (market value): $100,000,000
Cash and equivalents: $7,000,000
Receivables and accrued income: $4,075,000
Total assets = $111,075,000

Liabilities:
* Short-term liabilities: $13,000,000
Long-term liabilities: $2,000,000
Accrued expenses: $10,000
Total liabilities = $15,010,000

NAV = $111,075,000 − $15,010,000 = $96,065,000
If 5,000,000 shares are outstanding:
Per-share NAV = $96,065,000 / 5,000,000 = $19.21

Note: Purchase or redemption prices paid by investors are typically the per-share NAV plus or minus applicable fees (e.g., sales loads or redemption fees).

Mutual Funds, ETFs, and NAV

• Mutual funds calculate NAV once per business day after markets close and execute buy/sell orders at that NAV.
• ETFs compute NAV daily for reporting, but also maintain an intraday indicative NAV that updates frequently; ETFs trade on exchanges and their market price can differ from NAV.
• NAV differences create opportunities for trading (e.g., arbitrage in ETFs) and can signal investor demand or supply imbalances for closed-end funds.

Open-End vs. Closed-End Funds

• Open-end funds (most mutual funds) issue and redeem shares at NAV and do not trade on exchanges. They can issue an unlimited number of shares and are priced daily at NAV.
• Closed-end funds list on exchanges and trade like stocks. Their market price can trade at a premium or discount to NAV.

NAV and Fund Performance

• Comparing NAV between two dates does not fully capture investor returns because funds distribute income (dividends, interest) and realized capital gains to shareholders. These distributions reduce NAV even though investors receive the cash.
• Better performance measures:
• Annual total return (includes price change plus distributions)
• Compound annual growth rate (CAGR) for multi-year comparisons

NAV vs. Book Value and Shareholder Equity

• NAV for a fund is effectively the fund’s total assets minus liabilities divided by shares outstanding.
• Book value per common share applies to individual companies and may include intangible assets depending on accounting treatment.
• Shareholder equity often includes intangible assets like patents; NAV calculations typically emphasize the market value of a fund’s holdings.

Trading Timelines and Order Execution

• Mutual fund orders are generally executed at the per-share NAV determined on the fund’s trade date. Funds set cutoff times (commonly mid-afternoon) after which orders are processed at the next business day’s NAV.
• ETFs and closed-end funds trade continuously during market hours at market prices that may diverge from NAV.

Key Takeaways

• NAV measures a fund’s net value and is central to pricing mutual fund and unit trust shares.
• Per-share NAV = (Assets − Liabilities) / Shares outstanding.
• NAV is calculated daily using market closing prices; ETFs also provide intraday NAV estimates.
• Use total return and CAGR to evaluate fund performance more accurately than raw NAV changes.