What is net asset value (NAV)?

Net asset value (NAV) defined

If you’ve ever shopped around for funds to invest in, you’ve probably seen the term net asset value (NAV) at some point. Simply put, NAV is the net value – or worth – of an entity. People calculate NAV to determine the actual market value, or fair value, of an asset. It’s mainly used to determine the per-share value of a fund, such as a mutual fund, exchange-traded fund or closed-end fund.

As investors know, the price of a stock can change throughout the day based on the market. However, entities like mutual funds don’t trade in real-time; therefore, their value is calculated at the end of each day and based on the closing price of each security within a given portfolio. Investors can use this figure to compare the performance of one particular fund versus another fund or index, like the S&P 500.

Calculating NAV

To calculate NAV, subtract a fund’s total liabilities from its total assets (i.e., what the fund has minus what it owes). Then, divide this by the number of total outstanding shares.

NAV = (Assets - Liabilities) ÷ Total number of outstanding shares

In other words, the NAV is calculated from the daily closing price for each security in the fund, and it can be a way for investors to determine its trading price for each day.

Assets include the current value of all of the fund’s investments, cash and cash equivalents, accrued income (i.e., money earned but not yet received) and any outstanding dividend and interest payments.

Liabilities are classified as either short-term or long-term depending on when they must be paid. These could include all accrued expenses (like staff salaries), operating expenses, marketing expenses, management expenses, payments, fees and any money owed to outside entities, like lenders.

NAV in action

Here is an example of calculating the NAV for Mutual Fund A, which touts the following characteristics:

ASSETS: $500,000,000 + $20,000,000 + $10,000,000 + $500,000 = $530,500,000

LIABILITIES: $55,000,000 + $15,000,000 + $75,000 = $70,075,000

NAV: ($530,500,000 - $70,075,000) ÷ 20,000,000 = $23.02/share

Why is NAV useful?

NAV helps investors because it offers them the most accurate way to value shares in a fund. Using NAV, investors can compare a fund’s performance to the performance of other funds, which can guide them in selecting future assets that best fit with their investment goals.

Some funds, like closed-end funds, may have a market price that is higher or lower than the calculated NAV. If it’s higher, then the fund is trading at a “premium” to its NAV. If it’s lower, though, then the fund is trading at a “discount” to its NAV. Since the NAV is considered to be an accurate reading of a fund’s value, the discrepancy between the fund’s market price and its calculated NAV can tell you if the fund is overvalued or undervalued.

What are the drawbacks of NAV?

While NAV tells you what the underlying assets of the fund are worth, it doesn’t offer much in the way of forecasting the fund’s future performance. A better way to determine possible future returns may be to look at the fund’s returns over a defined period to better understand its potential. For reference, a one-year time period is a common benchmark used to determine a fund’s potential future performance.

For example, Mutual Fund B has a NAV of $25, while Mutual Fund C has a NAV of $20. This information tells you the current value of these funds, but it doesn’t tell you which fund has performed better over time. Now, say you do some research and see that Mutual Fund B went from $20 to $25 in one year, while Mutual Fund C went from $5 to $20 in that same period. With this in mind, we can see that Mutual Fund B returned 25% while Mutual Fund C returned 300%.

The bottom line

While NAV is useful for calculating the performance of securities in a fund, it may not be as useful when looking to calculate the possible future performance of a fund. Because of this, it’s good practice to consult a financial advisor who can help you determine whether a particular fund aligns with your investment strategy and goals.

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