What is a mutual fund's NAV?
Net asset value (NAV) represents a fund's per share market value. This 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.
An 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, if a fund has assets of $50 million and liabilities of $10 million, it would have a NAV of $40 million.
This number is important to investors, because it is from NAV that the price per unit of a fund is calculated. By dividing the NAV of a fund by the number of outstanding units, you are left with the price per unit. In our example, if the fund had 4 million shares outstanding, the price-per-share value would be $40 million divided by 4 million, which equals $10.
How Mutual Fund Shares Differ from Stocks
This pricing system for the trading of shares in a mutual fund differs significantly from that of common stock issued by a company listed on a stock exchange. In this instance, a company issues a finite number of shares through an initial public offering (IPO), and possibly subsequent additional offerings, which then trade in the secondary market. In this market, stock prices are set by market forces of supply and demand. The pricing system for stocks is based solely on market sentiment.
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, which is best judged by its total return.
To learn more about NAV, read the Mutual Fund Basics Tutorial tutorial.
The explanation provided here by Investopedia is well-stated. However, in more simple terms, the NAV is simply the price per share of the fund. Similarly to how stocks have a stock price, mutual funds have an NAV (net asset value). So, if you want to purchase one share of a mutual fund, you will purchase at the NAV. One difference between a mutual fund NAV and stock price is that the NAV will not change throughout the day like a stock price will. The NAV is updated at the end of each trading day. So, when you purchase a mutual fund at a listed NAV price, that listed price is actually the price as of yesterday's close. Therefore, your purchase will be based on the updated NAV at the end of the CURRENT trading day. Because of this, you may not know the exact NAV when you buy or sell shares.
It's important to know this because, for example, if you want to buy $10,000 worth of mutual fund ABCDX, and the NAV as of yesterday's close was $100, that would mean you purchase 100 shares. However, if the NAV increases drastically on the day you made your purchase, you would actually be purchasing more than the 10,000 you originally planned. For this reason, you can also buy or sell in "$" instead of "shares." This will help prevent that issue.
I hope this additional information was helpful for you, and good luck!
Joe Allaria, CFP®
Thank you for your question. A mutual fund NAV (Net asset Value) is the price per share of a particular fund, not including any load/sales charge that may have to be paid. Each fund has it's own NAV value, which is updated daily after the close of the markets.
I hope this information helps. You can find NAV's of funds on a variety of places on the web, like Google Finance.