What is 'Net Asset Value - NAV'
Net asset value (NAV) is value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time. With both security types, the per-share dollar amount of the fund is based on the total value of all the securities in its portfolio, any liabilities the fund has and the number of fund shares outstanding.
BREAKING DOWN 'Net Asset Value - NAV'
In the context of mutual funds, NAV per share is computed once per day based on the closing market prices of the securities in the fund's portfolio. All of the buy and sell orders for mutual funds are processed at the NAV of the trade date. However, investors must wait until the following day to get the trade price. Mutual funds pay out virtually all of their income and capital gains. As a result, changes in NAV are not the best gauge of mutual fund performance, which is best measured by annual total return.
Because ETFs and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar value above (trading at a premium) or below (trading at a discount) NAV. ETFs have their NAV calculated daily at the close of the market for reporting purposes, but they also calculate intra-day NAV multiple times per minute in real time.
Example Mutual Fund Net Asset Value Calculation
The formula for a mutual fund's NAV calculation is straightforward:
NAV = (assets - liabilities) / number of outstanding shares
In this context, assets include total market value of the fund's investments (priced using the closing price of all the assets on the day the NAV is calculated), cash and cash equivalents, receivables and accrued income. Liabilities equal total short-term and long-term liabilities, plus all accrued expenses, such as staff salaries, utilities and other operational expenses.
For example, a mutual fund has $100 million of investments, based on the day's closing prices for each individual asset. It also has $7 million of cash and cash equivalents on hand, as well $4 million in total receivables. Accrued income for the day is $75,000. The fund has $13 million in short-term liabilities and $2 million in long-term liabilities. Accrued expenses for the day are $10,000. The fund has 5 million shares outstanding. The NAV is calculated 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
In practice, the expenses many be numerous; operating expenses, management expenses, distribution and marketing expenses, transfer agent fees, custodian and audit fees are all included.
Relation to Share Price
Mutual funds and ETFs relate their market prices to NAV, but the market price includes fees such as sales loads or purchase fees. The price for selling a share is based on the per-share NAV but subtracts any fees charged at redemption, including deferred sales loads or redemption fees. Like stocks, the market value of mutual funds and ETFs also fluctuates based on supply and demand, but typically stays closely tied to NAV.
Net Asset Value (NAV) is the value of a mutual fund scheme’s assets minus the value of its liabilities per unit. It is the price at which you buy the unit of a scheme. It may also be the price at which you would sell the unit (minus any load if applicable).
However, there is still some confusion about the seemingly simple concept among some investors. Does the NAV also include all expenses? Is it better to invest in a scheme with a higher NAV or a lower NAV? Such queries are quite common in various mutual fund forums.
What is NAV?
NAV reflects the composite prices of all the securities held along with the liquid cash. It is calculated on a unit basis after deducting all liabilities. If the prices of the majority of the securities held by the scheme goes up, the NAV will also rise and vice versa. The NAV moves in tandem with the prices of the securities held by the scheme. As per mandate, a scheme should calculate and publish its NAV on a daily basis.
In simple words, NAV is the price which you pay to buy a unit of mutual fund scheme when you invest. You also sell it on NAV, but the sell price can be lower than NAV if there is an exit load. Exit load is always chargeable as a percentage of the NAV.
For example, you are investing Rs 10,000 in a scheme with an NAV of Rs 200. You will receive 50 units (10,000/200). Now, if the NAV increases to Rs 250 in a year and you decide to sell it. You will receive Rs 12,500 (50 units X Rs 250). And if exit load is applicable at the rate of 1 per cent, you will get Rs 12,375 (50 units X Rs 247.50 NAV minus the exit load).
How is NAV calculated?
The mathematical formula for calculating NAV is:
Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding units)
Assets of a mutual fund scheme are primarily divided into securities and liquid cash. Securities include both, equity and debt instruments, like equity shares, bonds, debentures, commercial papers, etc. Accrued interest and dividends also form part of the assets.
Debts include money owed for outstanding liabilities and expenses. All accrued expenses are included in this.
Number of units can be defined as the total number of units held by all the investors collectively.
Fund house takes into account the market value of all the assets on a daily basis to calculate the NAV.
Does NAV matter?
You may be buying and selling mutual fund units at NAV, but it shouldn’t be confused with the market price of a stock. The stock price is decided by investors in the stock market, depending on the fundamentals of the company, future prospects of the company, etc. That is why the market price can be different than the book value of the stock. The NAV is not decided by investors. It is the total value of the portfolio held by the scheme.
That is why it is not wise to base your investment decision on NAV of a scheme. Comparing the NAV of two mutual fund schemes does not tell you anything about their future prospects. As you know now, NAV reflects the total value of the schemes investments minus liabilities and expenses.
So, a higher NAV simply means that the scheme’s investments have fared really well. Or the scheme has been around for a long period.
The NAV only impact the number of units you may get. You will receive fewer units if you select a scheme with high NAV but the value of your investment will remain same. It is the performance and the returns generated by the mutual fund scheme that matters.
Consider two schemes – Scheme A and Scheme B - with an NAV of Rs 100 and 110 respectively. Suppose you are investing Rs 11,000. You will get 110 units (Rs 11,000/Rs 100) in Scheme A and you will get 100 units (Rs 11,000/Rs 110) in scheme B.
Now, suppose the NAVs have gone up by 10 per cent. That means Scheme A will have an NAV of Rs 110 and Scheme B will have an NAV of Rs 121. The value of your investments would become Rs 12,100 (110 units X Rs 110 NAV) in scheme A and Rs 12,100 in scheme B (100 units X Rs 121 NAV). Both schemes will give the same return of ten per cent (Rs 12,100-11,000/11,000).