Calculating the Net Asset Value of a Fund
Net asset value (NAV)
is significant only for open-end mutual funds. It is a simple calculation - just take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. Thus, if a fund has total net assets of $50 million and there are one million shares of the fund, then the NAV is $50 per share. (Fund liabilities include items such as fees owed to investment managers.)

For closed-end funds, share value is determined in the secondary markets (the formal exchanges) where the shares are traded. The NAV of a closed-end fund is the price per share multiplied by the total number of shares. Obviously, the value of a closed-end mutual fund changes continuously throughout the trading day.

For open-end mutual funds, NAV is a useful determinant for tracing share price movements. However, it is not useful for evaluating overall fund performance. This is because mutual funds are required by law to distribute at least 90% of their realized capital gains and dividend income to investors each year. When a fund pays investors the required distribution, its NAV is reduced by the amount of the distribution. Investors tracking only NAV may become concerned about the drop but in fact, the net value of their investment is unchanged; the reduction in NAV is offset by the amount of distribution they have been paid.

The most important thing to keep in mind is that NAVs change daily and are not a good indicator of actual performance because of the impact yearly distributions have on NAV (it also makes mutual funds hard to track).


Look Out!
The NAV is usually below the market price because the current value of the fund\'s assets is higher than the historical financial statements used in the NAV calculation
.




Fees

Related Articles
  1. Investing

    An Introduction To Closed-End Mutual Funds

    If you're looking to generate income for your investments, look no further.
  2. Investing

    What's a Closed-End Fund?

    A closed-end fund is a mutual fund that has an initial offering (IPO) of shares, and once those shares are sold, no additional shares are issued. Since it is a public offering, closed-end funds ...
  3. Investing

    Closed-End Vs Open-End Funds

    Much like an individual’s wardrobe, many portfolios are collections of separate items. They combine stocks and bonds and other investments into one product.
  4. Investing

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  5. Investing

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  6. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  7. Investing

    A Brief History Of The Mutual Fund

    This popular investment vehicle has seen its share of ups and downs, successes and scandals. Read all about it!
Frequently Asked Questions
  1. What is the formula for calculating the current ratio?

    Find out how to calculate the current ratio and what that result can tell you about a potential investment.
  2. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based.
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ...
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company (or more specifically, ...
Trading Center