Net asset value (NAV) represents a fund's per share market value. It is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding. A NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities.

For example, let's say a mutual fund has $45 million invested in securities and $5 million in cash for total assets of $50 million. The fund has liabilities of $10 million. As a result, the fund would have a total value of $40 million.

The total value figure is important to investors because it is from here that the price per unit of a fund can be calculated. By dividing the total value of a fund by the number of outstanding units, you are left with the price per unit—the form of measurement in which NAV is usually quoted.

Building on our previous example, if the fund had 4 million shares outstanding, the price-per-share value would be $40 million divided by 4 million, which equals a NAV of $10 per share.

Key Takeaways

  • Net asset value (NAV) represents a fund's per share market value.
  • NAV is calculated by dividing the total value of all the cash and securities in a fund's portfolio, minus any liabilities, by the number of outstanding shares.
  • The NAV calculation is important because it tells us how much one share of the fund is worth.

Value of Mutual Funds vs. Value of Stocks

The NAV pricing system for the trading of shares of mutual funds differs significantly from that of common stocks or equities, which are issued by companies and listed on a stock exchange.

A company issues a finite number of equity shares through an initial public offering (IPO), and possibly subsequent additional offerings, which are then traded on exchanges such as the New York Stock Exchange (NYSE). The prices of stocks are set by market forces or the supply and demand for the shares. The value or pricing system for stocks is based solely on market demand.

On the other hand, a mutual fund's value is determined by how much is invested in the fund as well as the costs to run it, and it's outstanding shares. However, the NAV doesn't provide a performance metric for the fund. Because mutual funds distribute virtually all their income and realized capital gains to fund shareholders, a mutual fund's NAV is relatively unimportant in gauging a fund's performance. Instead, a mutual fund is best judged by its total return, which includes how well the underlying securities have performed as well as any dividends paid.

Advisor Insight

Joe Allaria, CFP®
CarsonAllaria Wealth Management, Glen Carbon, IL

The NAV is simply the price per share of the mutual fund. It will not change throughout the day like a stock price; it updates at the end of each trading day. So, a listed NAV price is actually the price as of yesterday's close. But an order you put in will be based on the updated NAV at the end of the CURRENT trading day. As a result, you may not know the exact NAV when you buy or sell shares.

For example, if you want to buy $10,000 worth of mutual fund ABCDX, and the NAV as of yesterday's close was $100, that would mean you purchase 100 shares. However, if the NAV increases drastically on the day you made your purchase, you would actually be purchasing more than the 100 shares you originally planned. To prevent that issue, you can also buy or sell in dollar amounts instead of shares.