Net asset value, known as NAV, is a method for calculating the value of an investment fund or mutual fund. This valuation method is found by subtracting liabilities from assets. NAV is then broken down on a per-share basis to evaluate an investment’s performance. This helps investors determine when to buy or sell.
The rationale behind net asset value, or market value, is that the net value of a business closely resembles the book value. However, companies with high projected growth will often be valued more than their NAV. For closed-end funds, per-share NAV is very similar to the market share price of a publicly traded company.
The net asset value calculation contains two key formulas: the initial net asset value calculation and the per-share NAV. The net asset value formula uses two main categories found on the balance sheet: assets and liabilities. The initial NAV formula resembles the working capital formula, which subtracts current liabilities from current assets. However, NAV includes total assets and liabilities, creating the following formula:
Net Asset Value = Assets – Liabilities
To find the per-share NAV, you divide your net asset value by the total number of shares outstanding. Mutual funds, investment trusts, and other funds will have the number of shares outstanding readily available in their financial statement package or on the balance sheet. Here’s the formula for per-share NAV:
Per-Share Net Asset Value = (Assets – Liabilities) / Outstanding Shares
Let’s say you are considering an investment in a mutual fund. The assets of the mutual fund are $5,000,000 and the liabilities are $3,000,000. Subtracting the $3,000,000 of liabilities from the $5,000,000 in assets results in a net asset value of $2,000,000. Now, let’s say that the mutual fund has 1,000,000 outstanding shares. Dividing this by the net asset value creates a mutual fund NAV of $2 per share.
Net asset value is a fundamental calculation when making mutual fund investment decisions. Mutual funds collect capital from a wide pool of investors. This capital is then used to make different investments, such as into stocks, securities, and bonds. The portion each investor receives from the mutual fund is based on their investment. NAV is the pricing model used to determine the percentage of the mutual fund received.
Unlike publicly traded companies that have fluctuating share prices throughout the day, mutual fund pricing is usually calculated once a day at the closing prices. The closing prices of all investments in the mutual fund will be determined and the liabilities will be factored into the net asset value calculation. The total value of the fund will then be used to determine the share basis for each investment.
NAV is commonly used to evaluate fund performance between two different close dates. For example, an investor might compare the NAV on January 1 to the NAV on December 31. This insight allows investors to gauge the fund’s performance. For example, if the per-share NAV increases from $2 to $5, investors might summarize that the fund is either accumulating more assets or paying down debt.
It’s important to keep in mind that changes between NAV dates don’t always accurately represent growth. For example, if the market drops at the beginning of December, the ending NAV value won’t be representative of the fund’s growth over the past 12 months. Calculating the annual total return is beneficial alongside NAV to get a full picture of a fund’s performance.
Additionally, mutual funds and REITs are required to pay out most, if not all, of their income to shareholders, including dividends and interest. As these items are paid out, NAV will decrease. As a result, investors calculating NAV will also need to consider the impact of investment income before making decisions. Moreover, a higher NAV isn’t always indicative of a “better” fund. Instead, a high NAV simply means the fund has more assets, less liabilities, or fewer shares outstanding.
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