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

    Open Your Eyes To Closed-End Funds

    Although less popular than their open-ended counterparts, these investment vehicles are worth a second look.
  2. Investing

    Closed-End vs. Open-End Funds

    Open-end products may be a safer choice than closed-end, but closed-end funds might produce a better return.
  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

    What Are the Advantages of Closed-End Funds?

    Often forgotten, closed-end funds are publicly traded and can be found on the secondary market.
  5. Investing

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  6. Investing

    Liquidation Blues: When Mutual Funds Close

    Underperforming mutual funds can be liquidated, leaving investors down and out.
  7. Financial Advisor

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  8. Investing

    When to buy a mutual fund

    Doing a little research can help you find out if mutual funds are a good fit for your portfolio.
Trading Center