Net Asset Value (NAV): Overiew
The net asset value of an investment fund is calculated by dividing the number of outstanding shares by the net value of the fund’s assets less its liabilities. The price at which the shares of funds registered with the U.S. Securities and Exchange Commission (SEC) are traded is referred to as the NAV most frequently when discussing mutual funds or exchange-traded funds (ETFs).
Understanding Net Asset Value (NAV)
The difference between assets and liabilities for businesses and other legal organizations is referred to as the capital of the firm, net worth, or net assets. The fund value and price, which are determined by dividing the difference between assets and liabilities by the number of shares held by investors, are referred to as NAV.
It is simpler to use the fund’s NAV for pricing and trading fund shares since it represents a “per-share” value of the fund.
NAV is frequently close to or equal to a company’s book value. Historically, companies with strong growth potential have been valued higher than their NAV may indicate. Market capitalization and NAV are typically compared to identify investments that are overpriced or undervalued.
NAV Calculation Example
Assume a mutual fund has assets totaling $100 million in a variety of securities, with the value of each investment determined by the asset’s closing price for the day.
It also has $4 million in total receivables and $7 million in cash and financial equivalents on hand. The day’s total earned money is $75,000 The fund owes $2 million in long-term debt and $13 million in short-term debt.
The total day’s costs are $10,000. There are 5 million active shares of the fund. Using the formula above, the NAV is determined 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
The mutual fund shares will trade for $19.21 per share on the specified day.
Conclusion
The net asset value of an investment fund is calculated by dividing the number of outstanding shares by the net value of the fund’s assets less its liabilities. The pricing of each share is based on the NAV, and funds may be open or closed. The NAVPS, or per-share value, represents the cost of each fund share.
