When you buy shares of a mutual fund or exchange-traded fund (ETF), the fund pools your money from other investors. It’s not always easy to understand details about a mutual fund’s underlying investments because of the monthly holdings reporting requirements, vs. an ETF, which reports its holdings daily. The net asset value (NAV) calculation, which is the result of the many different investments by the fund, can help you understand the market value of the fund holdings and potentially guide your investing decisions.
What is NAV?
Net asset value (NAV) shows the fair market value of a mutual fund or ETF based on its holdings. If you buy a stock, you can see its market price per share on its stock ticker. To determine the market value for that investment, multiply your total shares by the market price. However, a mutual fund or ETF might invest in hundreds of different stocks, bonds, and other securities, all at various prices and amounts. NAV calculates the total value of everything a fund owns minus its liabilities, divided by the number of outstanding shares. For mutual funds, that shows what investors pay per share based on the underlying investments. However, since you can trade ETFs throughout the day, their NAV will fluctuate based on market activity.
How does NAV work?
The NAV calculation tallies up everything a fund owns for investments and cash, then subtracts everything it owes for debts and other liabilities, and divides that by the number of outstanding shares. The net result shows the fair market value of the fund’s holdings. NAV could change daily based on market performance and decisions the fund manager makes regarding assets and liabilities.
The Securities and Exchange Commission (SEC) requires mutual funds and ETFs to calculate NAV daily at a minimum. Mutual funds usually calculate their NAV at the end of stock market trading hours. This gives investors a quick insight into the value of the fund holdings and sets the price for buying or selling shares. Most mutual funds trade based on the NAV at the end of each business day.
Why is NAV important?
NAV is important because it conveys a lot of information about a fund’s holdings in a single number. Without it, if an investor wanted to know the value of all the fund’s holdings, they’d have to do the math based on how the portfolio is allocated—a lengthy and complex calculation.
NAV is also important because it can be used to track a fund’s performance over time, and it can help investors find buying and selling opportunities, especially for ETFs. ETFs change prices and trade throughout the day, like stocks. The market price might end up drifting away from the NAV of the underlying investments. This could be an opportunity for an investor to buy certain funds at a discount or to sell at a profit against the NAV.
Additionally, certain big financial firms, called authorized participants or APs, can create or remove ETF shares to help keep the ETF’s price close to the value of the investments it holds and aligned with their NAV.
NAV formula
The NAV formula is as follows:
NAV formula example
Here’s an example of how to calculate NAV. Let’s say a mutual fund has $200 million in securities based on the market value of its holdings at the end of a trading day. It also has $5 million in cash and has earned another $250,000 from its investments’ performance that day.
As for liabilities, the mutual fund has $15 million in short-term debt and $7 million in long-term. It also spent $50,000 that day. The fund has 10 million outstanding shares.
To get the NAV, first total up its assets.
$200 million + $5 million + $250,000 = $205,250,000 (total assets)
Then add up its liabilities.
$15 million + $7 million + $50,000 = $22,050,000 (total liabilities)
Next, subtract total liabilities from total assets.
$205,250,000 (total assets) – $22,050,000 (total liabilities) = $183,200,000
Finally, divide by the number of outstanding shares.
$183,200,000/10 million (shares) = $18.32
If the market price and NAV are in line, investors who want to purchase this fund would pay $18.32 per share plus any sales or transaction fees. Current fund shareholders who want to sell would receive $18.32 per share, minus any fees.
How to use NAV when investing
Now that you know what a NAV is, how can you put this number to use? Here are a few ways:
Competitive pricing with fees
Funds use NAV to set the price of shares. However, that may not be the exact price you use when buying and selling. You may pay a sales load to purchase fund shares. For example, if you pay a 5% load and buy $1,000 worth of shares, $50 goes to the fee, and the remaining $950 buys your shares. You might also pay a redemption fee when selling fund shares.
Performance tracking
If a fund’s investments are doing well, they could grow in value, bringing up the NAV too. You could track the NAV over time to ensure it increases, generating a positive return if you sell.
Distributions
When tracking NAV, pay attention to distributions during the year, such as dividend payments and distributions of capital gains to investors. These reduce NAV but not because of performance; the fund is giving back money to investors. So pay attention to whether changes in NAV come from distributions or investment performance. You can find this information in the fund’s prospectus.
Open-end vs. closed-end funds
Open-end funds can take on unlimited investors. They allow investors to buy and sell shares at the end of the trading day at a price based on the NAV plus fees. Most mutual funds are open-end: There’s no real opportunity to use NAV to find discounted or overpriced fund shares because with these funds, the NAV and price are more likely to be the same.
That’s not the case with closed-end funds, which issue a limited number of shares. These shares can be bought and sold like stocks when markets are open and change prices throughout the trading day. ETFs also trade like this, though many ETFs issue unlimited shares.
With closed-end funds and ETFs, the price could temporarily shift away from the NAV based on demand. If the price falls below the NAV, it's trading at a discount, which could be a buying opportunity. If the price goes above the NAV, the shares could be overpriced. It could be a chance to sell your shares at a profit or, if you’re an experienced investor comfortable with the risks, short-sell the fund for a potential profit. Note that taking advantage of the NAV straying from the share price in either direction is an advanced strategy for sophisticated investors.