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NAV (Net Asset Value): Why It Matters, and What to Know

By Colin Dodds · March 09, 2021 · 3 minute read

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NAV (Net Asset Value): Why It Matters, and What to Know

A mutual fund’s Net Asset Value (NAV) is the key to knowing how much each share of a mutual fund is worth, which can help an investor calculate what their total mutual fund holdings are worth—but it’s not the whole story.

Calculating NAV is helpful for fund valuation and pricing, but there are times when it is more helpful to look at a fund’s total returns. This article will explain how to calculate NAV, when it makes sense to use it, and why.

What is Net Asset Value?

For investors, a fund’s NAV is a simple way to track its performance over time. If the NAV has gone up over a given period of time, that means its investments have delivered a return in that timeframe. If it has gone down, it means the investments in that fund have delivered losses.

How Do Investors Calculate Net Asset Value?

To calculate a fund’s net asset value (NAV), one should take the fund’s total assets minus its liabilities, divided by the number of outstanding shares. The formula looks like this:

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

This method of pricing differs from stocks, which trade on an exchange. A stock’s price is based on what investors are willing to buy and sell it for—and as such, it varies throughout the trading day. A mutual fund, on the other hand, only prices its shares once per day, and that price is based entirely on the underlying securities—usually stocks and bonds—that it invests in.

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.

Why Do NAVs Change?

A mutual fund’s NAV will likely change every single trading day. This is because the assets in which it invests are likely to change every trading day. It’s also because the number of shares held by investors is likely to change daily, as new investors buy shares and existing investors sell. Those new investments—or investors cashing out—force the fund manager to either buy or sell the fund’s underlying investments, which will affect the NAV of the fund.

Other factors can also impact a fund’s NAV. The fund’s management fee, as well as other fees that add up to the fund’s total expense ratio, will come out of the NAV. In addition to management fees, these expenses can include fees 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.

Some mutual funds do split their shares (much like stock splits) or even enact reverse splits. And while splits and reverse splits can have real meaning and impact for the stocks affected—and on the fund’s NAV—they make no impact on the underlying value of the fund or its holdings. Nor do they generally mean much for the mutual fund’s investors.

When NAV Isn’t Everything

If the fund invests in dividend-paying stocks, the dividend and interest payments from a fund’s underlying securities will come out of the NAV. Those dividends go to the investor, who can opt to reinvest the money by buying new shares of the same mutual fund. That’s one reason why the net asset value may not be the only figure to pay attention to when it comes to certain kinds of mutual funds.

When comparing the performance of equity funds with an income component, it can make sense to look at the total return of the funds. The total return takes into account 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.

Recommended: What is a Dividend?

When comparing mutual funds that place a heavy emphasis on yield, such as Real Estate Investment Trusts (REITS), money market funds, or other mutual funds that invest heavily in fixed-income securities, the net asset value only tells a small part of the story. For these funds, looking at their relative yields and the fees they charge may make more sense.

How NAV Works for Mutual Fund Investors

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.

Those cutoff times vary from fund to fund, and certain fund companies may even impose a 1-to-2 day processing period. So, for investors looking to take advantage of current market movements, beware that you may not be able to buy or sell for the NAV you find online.

ETFs and iNAVs

Each mutual fund’s team spends the hours after market close combing through their portfolios, tallying up the value of their holdings, tabulating their losses, and calculating the fees and other expenses for the day. But things are very different for a close cousin of traditional mutual funds, Exchange Traded Funds (ETFs).

Investors can make buy and sell orders for traditional mutual funds once per day, and only at their published NAVs. But investors can buy and sell ETFs throughout the trading day. That’s when an iNAV, or indicative net asset value, comes into play. The iNAV tracks the value of an ETF’s portfolio throughout the trading day. The listing exchange of a given ETF calculates its iNAV continuously—usually every 15 seconds—over the course of each trading day.

But even the most recent iNAV is simply a guideline, based on the value of the ETF’s underlying securities. In practice, investors will almost always buy or sell an ETF for a price that’s slightly higher or lower than the iNAV.

Because ETFs tend to trade at a premium or a discount to their iNAV, it can pay to look at the make sure that discount or premium benefits you before buying or selling. That said, these inefficiencies in the ETF market aren’t a major issue for large, heavily traded ETFs popular with most investors.

The Takeaway

Net asset value, or NAV, is a daily calculation that can track a mutual fund’s performance over time. But while this figure can be useful when gauging performance, and also when considering buying or selling, it isn’t the only metric to pay attention to. Total return, relative yield, and fees are also important figures.

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