Net asset value

Definition

Net asset value (NAV) is a financial metric that represents the per-share market value of a mutual fund, exchange-traded fund (ETF), or a similar investment company.

What is net asset value?

Net asset value is a key indicator used by investors to assess the value of their holdings. The calculation of NAV is a fundamental part of the daily operations of open-end mutual funds.

The formula for calculating net asset value is:

NAV = (Total assets – total liabilities) / Number of outstanding shares

NAV is calculated at the end of each trading day and represents the value per share that investors would receive if the fund’s assets were sold and liabilities paid off.

In the context of mutual funds, NAV is used to determine the purchase and redemption price of shares. Investors buy shares at the offering price (NAV plus sales charges) and sell shares at the redemption price (NAV minus any applicable redemption fees).

NAV is a crucial metric for assessing the performance of an investment fund. Changes in NAV over time reflect the gains or losses in the value of the fund’s underlying assets. NAV provides transparency to investors regarding the current value of their investments. It is a critical tool for evaluating the financial health of an investment fund.

Monitoring changes in NAV helps investors and fund managers assess the risks associated with the underlying assets and market conditions.

Example of net asset value

Let’s consider a mutual fund called “ABC Equity Fund.” The fund holds various assets such as stocks, bonds, and cash, with a total value of €10 million. It has liabilities, including fees and expenses, totalling €1 million.

To calculate the net asset value (NAV) of the ABC Equity Fund we use the formula from above:

Assuming there are 1 million shares outstanding:

NAV = (€10,000,000 – €1,000,000) / 1,000,000 shares = €9 per share

In this example, the net asset value (NAV) of the ABC Equity Fund is €9 per share. This means that each share of the mutual fund represents ownership of €9 worth of assets after deducting liabilities.