Net Asset Value Definition

Investors, traders, money managers, and investment businesses can use NAV to identify new investment opportunities and determine if a fund is overvalued or undervalued and how it affects the total return of their portfolio. Accordingly, the U.S. Securities and Exchange Commission (SEC) recommends that mutual funds and Unit Investment Trusts (UITs) calculate their NAV once every business day.

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Key Takeaways

  • Net Asset Value or NAV is the difference between the total value of assets owned and the total liabilities owed by a business or financial instrument divided by the number of outstanding shares.It represents the per share or unit market value of securities, book or equity value of a business, and the net value of a mutual fund and exchange-traded fund on a given day.The NAV is directly proportionate to the value of the securities. It fluctuates every day due to the change in the value of the fund’s assets, liabilities, and shares accessible at the end of a trading day.NAV helps investors, traders, money managers, and investment firms find new investment opportunities.

Understanding NAV

Net Asset Value (NAV) applies to any business entity or financial instrumentFinancial InstrumentFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more having assets and liabilities. It is the difference between the fund’s total assets and the total liabilities and dividing it by the number of outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more.

When calculated on a per-share or unit basis, it helps investors determine the return on their investments by the end of the trading day. It is the price at which they can buy, sell, or redeem shares in SEC-registered funds. However, investors need to have an investment account to calculate NAVCalculate NAVNet Asset Value is calculated by subtracting the total value of the entity’s liabilities from the total value of its assets and dividing the result by the total number of outstanding shares.read more. 

The NAV is directly proportionate to the value of the securities. It means as the value of the securities rises, so does the value of NAV, and vice versa. Since the value of the fund’s assets, liabilities, and shares is available at the end of a trading day, the NAV fluctuates every day. Therefore, it does not indicate how good or bad the fund is. Hence, investors should look at its annual returnsAnnual ReturnsThe annual return is the income generated on an investment during a year as a percentage of the capital invested and is calculated using the geometric average. This return provides details about the compounded return earned yearly and compares the returns supplied by various investments like stocks, bonds, derivatives, mutual funds, etc.read more before investing in a fund.

NAV represents the net value per share, book, or equity value of a business and the net value of a fund. It is deemed less important in industries where humans are valuable assets that cannot be mentioned on the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more. For NAV, assets are anything related to monetary investment.

Importance Of NAV

NAV helps traders identify the anchoring point to know whether the market is favorable for trading. Aside from that, there are many benefits of calculating it, such as:

  • Estimate the returns at maturity based on the per share or unit NAVKnow the value per share of a mutual fundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more or ETFETFAn exchange-traded fund (ETF) is a security that contains many types of securities such as bonds, stocks, commodities, and so on, and that trades on the exchange like a stock, with the price fluctuating many times throughout the day when the exchange-traded fund is bought and sold on the exchange.read moreAnalyze the daily performance of a fund and compare it to othersIdentify new investment opportunitiesDetermine whether a fund is overvalued or undervalued and how this affects the portfolio’s total return

Calculate NAV

NAV is calculated as part of fund accounting, also referred to as securities accounting, investment accounting, and portfolio accounting. For a business, the difference between its total assets and liabilities results in its net asset or net worth. In this case, NAV is either equal to or close to the firm’s book valueBook ValueThe book value formula determines the net asset value receivable by the common shareholders if the company dissolves. It is calculated by deducting the preferred stocks and total liabilities from the total assets of the company.read more, equity valueEquity ValueEquity Value, also known as market capitalization, is the sum-total of the values the shareholders have made available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding.read more, or capital owned.

The standard Net Asset Value formula for a business is:

NAV = Assets – Liabilities

Here,

  • Assets include the total value of the securities owned by the business, andLiabilities include the full amount that the business owes and must spend to settle its loans and expenses

It also represents a financial instrument’s closing market value at the end of a trading day.

The formula used to calculate the Net Asset Value per share for an investment fund is:

NAV = (Assets – Liabilities) / Total number of outstanding shares

  • The total number of outstanding shares signifies the number of units constituting a fund.

Investment companies use this formula to determine the return investors are eligible to receive, depending on the number of shares/units of the fund they own.

Examples of NAV 

Let us consider the following NAV example with calculation to get an in-depth insight into the concept:

Example #1 (Mutual Funds)

In mutual funds, the term ‘mutual’ signifies many investors investing in the same financial product, and a ‘fund,’ as already known, is where the investment is pooled together. Here, capital investedCapital InvestedCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more by investors is accumulated together. Therefore, it becomes crucial for each to calculate their returns at maturity based on the number of shares they own.

Mutual fund assets = Total market value of investments pooled together, cash, account receivables, cash equivalents, and accrued income

Mutual fund liabilities = Bank loans, debts, pending payments, and fees 

So,

For example, Patricia invests in a mutual fund with 30,000 units. The value of fund assets is worth $20 million. The short-term and long-term liabilities are $2 million and $1 million along with other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more, totaling $2 million. She wants to know the Net Asset Value of a mutual fund for 2,000 shares after the tenure ends, considering the market rates and conditions remain the same.

To calculate Patricia’s return, the first thing required would be to find out per share NAV:

              = {20,000,000 – (2,000,000+1,000,000+2,000,000)} / 30,000

               = (20,000,000 – 5,000,000) / 30,000

               = 15,000,000 / 30, 000

               = $500

Since, the per unit price of the fund share = $500

Patricia’s NAV, therefore, would be = 500 * 2000

                                       = $1,000,000

Example #2 (Exchange Traded Funds)

The NAV for ETFs is officially calculated every trading day. It is based on the value of the underlying assetsUnderlying AssetsUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates.read more at the closing trade hours as per different time zones. The details of the fund’s holdings are provided every day. This transparent procedure makes the ETF the most common form of investment for individuals. Though NAV for mutual and closed-end fundsClosed-end FundsA closed-end fund refers to a professionally managed fund whereby an investment company issues the initial public offering to raise capital. Later, these stocks are exchanged in the open market among the shareholders like other shares. Such investments provide better returns than the open-end funds.read more are calculated daily, the portfolio holdings are revealed at the end of each quarter.

Like mutual funds, the NAV for ETFs is calculated on a per-unit basis, dividing the difference between the total assets and liabilities by the total number of outstanding units. In this case, however, investors can track their assets and liabilities and be prepared to receive the NAV concerning the same.

This has been a guide to Net Asset Value and its definition. Here we discuss how to calculate net asset value, along with examples and importance. You can learn more from the following articles –

The formula to calculate NAV for a business is:NAV = Assets – LiabilitiesPer-share Net Asset Value calculator as utilized by investment companies, the formula is:NAV = (Assets – Liabilities) / Total number of outstanding shares

NAV assists in determining the anchoring point for deciding if the market is moving in the company’s favor or against it. As a result, a greater value indicates better investment returns.

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