Net Asset Value (NAV): What It Means, Formula, Example

By Michael Flannelly · April 30, 2024 · 8 minute read

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Net Asset Value (NAV): What It Means, Formula, Example

Net asset value (NAV) is an important metric for knowing how much each share of an investment fund, like a mutual fund or ETF, is worth. However, NAV alone cannot tell investors everything they need to know about potential investments.

Calculating NAV is helpful for fund valuation and pricing. Still, there are times when it is more beneficial to look at other aspects of a fund, like total return, to determine investment opportunities. Nonetheless, investors need to know how to calculate NAV, when it makes sense to use it, and why.

What Is Net Asset Value (NAV)?

Net asset value, or NAV, represents the value of an investment fund. NAV, most simply, is calculated by adding up what a fund owns (the assets) and subtracting what it owes (the liabilities).

NAV is typically used to represent the value of the fund per share, however, so the total above is usually divided by the number of outstanding shares. This makes it easier for investors to value and price the shares of a fund. Mutual funds, for example, use per-share NAV to determine their share price.

The NAV will also change daily because an investment fund’s assets and liabilities change daily based on market prices.The assets of an investment fund include the daily market value of the fund’s holdings, which are usually securities like stocks and bonds. The liabilities of a fund are usually debts owed to financial institutions and expenses, like salaries, operating costs, and other fees.

The Securities and Exchange Commission (SEC) requires that mutual funds calculate their NAV at least once each business day. Most mutual funds perform their calculations after the major U.S. securities exchanges close for the day.

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NAV Formula

Net asset value, as mentioned above, is calculated by taking a company or investment fund’s total assets and subtracting its liabilities. This figure is usually divided by the fund’s number of outstanding shares because NAV is generally represented on a per-share basis. The formula looks like this:

NAV = (Total Value of Assets – Total Value of Liabilities) / Number of Shares Outstanding

How NAV Is Used for Investments

NAV can be used for investments, and by investors, in a number of ways, often depending on the specific type of asset an investor is analyzing. It can give investors insight into a fund’s performance, but doesn’t necessarily tell the whole story.

Mutual Funds

Mutual funds are usually open-ended funds, meaning that investors buy and sell shares of the fund from the fund directly and not on an exchange like a stock. Because these funds don’t trade on an exchange for market prices, NAV is used to price the fund’s shares.

Mutual funds calculate their NAV per share daily, usually at the end of the business day, and that is the price an investor will pay to buy or sell shares in the fund. Every mutual fund company has its own cut-off time for buying and selling shares. After that time, investors buying or selling shares will get the fund’s NAV for the day after their transaction order is received.

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ETFs

Exchange-traded funds (ETFs) and closed-end funds are similar to traditional mutual funds, but one big difference is that investors can buy and sell ETFs throughout the trading day for a market price and not the NAV per share. Investors can make buy and sell orders for traditional mutual funds once per day and only at their published NAVs.

ETFs are still required to calculate the fund’s NAV once per day, like a mutual fund. Additionally, an ETF’s NAV is calculated approximately every 15 seconds over each trading day and published on various financial websites.

Because ETFs tend to trade at a premium or a discount to their NAV, traders often compare market prices and NAV to take advantage of the differences and make investment decisions.

Example of Calculating Mutual Fund NAV

As an example of calculating mutual fund NAV, imagine that mutual fund XYZ has $100 million worth of investments in different securities, based on the day’s closing prices for each security, and $10 million in liabilities and expenses. The NAV for this fund would be $90 million. If the fund has 5 million shares outstanding, the NAV per share for mutual fund XYZ would be $18.

The NAV for mutual fund XYZ can be calculated using the above formula:

NAV = ($100,000,000 – $10,000,000) / 5,000,000 = $18

How to Interpret NAV Results

A fund’s NAV alone doesn’t tell investors much; a high NAV for one fund is not necessarily better than a low NAV in another fund. Similar to stock prices, a high stock price doesn’t necessarily mean the stock is a better investment than a stock with a lower price.

Looking at a fund’s NAV and comparing it to another fund does not provide investors insight into which fund is the better investment. It’s more important for investors to look at NAV alongside other factors, like the fund’s past performance, the allocation of securities within each fund, and how it performs compared to benchmark indices like the S&P 500 Index.

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Why Do NAVs Change?

A mutual fund’s NAV will likely change every trading day because the prices of securities in which the fund invests are likely to change every trading day, affecting the total assets in the fund. It’s also because the number of outstanding shares held by investors often changes daily, as new investors buy shares and existing investors sell.

Other factors can also impact a fund’s NAV. For example, the fund’s management fee and additional fees that add up to the fund’s total expense ratio will come out of the fund’s total assets, thus affecting NAV. In addition to management fees, expenses can include costs related to the administrative, compliance, distribution, management, marketing, shareholder services, and record-keeping of the fund. It’s common practice for mutual funds to assess this debit on the fund’s assets every trading day.

When NAV Isn’t Everything

If a mutual fund invests in dividend-paying stocks or fixed-income assets, these securities’ dividends and interest payments go to the investor. Additionally, a mutual fund may distribute realized capital gains to shareholders. These payouts reduce the fund’s assets and result in a lower NAV. Because these benefits lower a fund’s NAV, it shows that NAV may not be the only figure to pay attention to when analyzing the performance of a fund.

When analyzing the performance of mutual funds, it can make sense to look at metrics other than NAV alone, like investment yield and the funds’ total return. The total return considers capital gains and losses from all of the securities the fund invests in, as well as the dividends and interest earned by the fund, minus the fund’s expenses.

The Takeaway

Net asset value, or NAV, is a daily calculation that can track the value of a mutual fund, ETF, or money market fund. But while this figure can be helpful to gauge a fund’s performance, it isn’t the only metric that investors should consider. Total return, yield, and fees are also important figures when making mutual fund investing decisions.

Remember that NAV itself doesn’t tell an investor everything that they need to know, but is just one metric or data point that can be used along with an array of others to analyze funds.

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FAQ

Is net asset value the same as price?

NAV and share price are two different things. Net asset value is the value of the investments within a fund, or the value of a portion of the fund. The share price of a fund, though it may be related, is different from that value.

Why is net asset value important?

Net asset value is important for investors because it describes the total equity or value of a fund. It can help determine the value a share of a fund has, and can help investors evaluate the overall value of an investment.

Is high NAV good or bad?

NAV on its own doesn’t tell investors a whole lot, so whether NAV is high may not be good or bad. What’s more important is how high a fund’s NAV is relative to other metrics, which may include its market price.

Is it good to invest when NAV is down?

If a fund’s NAV is down, that could be a sign that the fund’s performance is suffering. But it doesn’t necessarily mean that it’s a good time to invest in that fund, or a bad time to do so – other metrics must be considered along with NAV, at any given time, to determine whether an investor wants to alter their position.

What is an example of a NAV?

An example of NAV could be $18, and that would be calculated looking at a fund’s underlying securities. You’d need to rope in assets and liabilities, and calculate accordingly to find NAV. Again, $18 is just an example, as NAV could be any dollar figure as it relates to the fund’s assets and liabilities.


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