» Dictionary of Mutual Fund Terms » How to Calculate Net Asset Value

Calculate Net Asset Value (NAV)

Net Asset Value (NAV) is widely used when referring to mutual funds. In order to be able to make better investment choices you should be able to understand what stays behind the number of the Net Asset Value and be capable of calculating it for yourself.

Net Asset Value Definition:

The Net Asset Value stays for the price of a fund's share. Therefore, when you read that a fund's NAV is $10, you should expect that you can buy the fund's shares for $10 each. An exception from this rule is the case of some loaded funds.

The Net Asset Value of a fund is calculated on daily basis, so at the end of the trading day you will know at what price you can both buy and sell a particular share that is part of a fund. This is due to the fact that mutual funds hold securities. In contrast the prices of stocks change every second, so when you trade stocks toy should be on a constant watch.

Net Asset Value Calculation

Follow these simple steps:

  1. current market value of net assets = securities - liabilities = A
  2. NAV = A / # outstanding shares

Explanation: In order to calculate the Net Asset Value of a fund, you need the current market value of its net assets. It is calculated by subtracting its liabilities from the fund's securities. After you have got this number all you have to do is to divide it by the number of outstanding shares.

Example: The net assets of a fund are equal to $40 million. The fund holds 1 million shares. Therefore, NAV = $40 ($40 million / 1 million)

Net Asset Value Application

NAVs represent a good way to keep track of price changes of your mutual fund. But you should keep in mind that NAVs are not representative of the performance of the fund, since the NAV decreases every time the fund pays distributions to its shareholders. These are required by law; therefore there is no need for worry if you see a substantial drop in the price of your shares. This can be attributed to the distributions that have been paid to the shareholders, not to a bad performance of the fund. Since mutual funds are required by law to distribute at least 90% of their capital gains annually, you should expect a drop in the NAV at some time.

Remember that Net Asset Values change daily! So, they are not a good performance indicator, since distributions and other factors obscure the exact state of your portfolio investment! As a result, your ability to track the activity of the mutual fund is hampered.

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