Net Asset Value

Author: Sarthak Bhalerao

Introduction

The term Net Asset Value (NAV) is a widely quoted term when it comes to investments. Manu of you might have heard about NAV in the context of mutual funds, ETFs, etc. It is used to determine the fund’s performance and to keep a track of your gains in the funds. So, what exactly is NAV and how is it calculated? Let us get right into it!

Table of Content

1. What is Net Asset Value?
2. The formula for Net Asset Value
3. Net Asset value for Mutual Funds
4. Conclusion

What is Net Asset Value?

Net Asset Value (NAV) the value of a fund’s assets minus the value of all its liabilities. Basically, the NAV is the value per unit for any particular mutual fund. The term NAV is used in context with Mutual Funds and Exchange-traded Fund (ETF), and it is used to determine the value of the assets of the mutual fund managing company. Shares of such funds are redeemed at their net asset value. NAV helps determine which investment one could choose to buy or redeem in their investment portfolio by providing a reference value. [1] [2]

Formula for Net Asset Value

The formula for NAV is as follows:

Net Asset Value = Value of Assets – Value of Liabilities

The NAV is usually represented on a per share basis. In this case, the formula would be:

Net Asset Value = (Value of Assets – Value of Liabilities)/Total number of Outstanding Shares

Let us look at an example where we calculate the NAV with the following data(USD): 

• Value in securities = $50 million
• Cash and Cash equivalents = $12 million
• Accrued income = $18 million
• Accrued expense = $8 million
• Short term liabilities  = $3 million
• Long term liabilities = $11 million
• Outstanding shares = $20 million

Net Asset Value (NAV)= (50,000,000+$12,000,000+$18,000,000 – $8,000,000 – $3,000,000 – $11,000,000) / 20,000,000 = $2.9

Net Asset Value for Mutual Funds

Unlike stocks, mutual funds do not trade in real-time. Instead, they are calculated based on trading methods and depend primarily on various assets and liabilities. 

Assets of a mutual fund include the market value of the funds’ investments, receivables, cash and cash equivalents, accrued income, etc. The market value is calculated at the end of each day based on the closing price of various securities included in the fund’s portfolio. They may include liquid capital, interest payments, dividends, etc [3]. 

The liabilities section includes outstanding payments, short-term and long-term obligations, money owed to lenders, other fees, etc. They can also include accrued expenses like utilities, staff salaries, operating expenses, distribution, management expenses, etc. Thus, for the net asset value calculation of mutual funds, the above-mentioned liabilities and assets are considered [4]. 

Conclusion

The fund’s NAV represents a “per-share” value of the fund, which makes it easier to be used for valuation and transactions. However, the NAV does not represent the fund’s performance and just because a fund has a low NAV does not make it a comprehensive investment. Therefore, investors should check the current cost of funds and their historical performance before choosing to invest in them.

References