What is 'Discount to Net Asset Value'

Discount to net asset value (NAV) is a pricing situation that occurs when a fund’s market trading price is lower than its net asset value. Discounts can occur in times where the market has a pessimistic future outlook on the underlying mutual fund holdings. Other factors may also influence a mutual fund discount.

BREAKING DOWN 'Discount to Net Asset Value'

A discount to NAV can occur with closed-end mutual funds and exchange-traded funds (ETFs). Both of these investments trade on the open market and calculate a daily NAV. A discount to NAV occurs when the market trading price is lower than the most recent NAV. A discount often indicates the market is generally bearish on the investments in the fund and the fund company’s potential to generate returns.

The net asset value of a fund is calculated after the close of each trading day. It is considered a forward price NAV since it accounts for all transactions that have occurred since the previous day’s price calculation. The net asset value is the value of the fund’s total assets at market close minus the fund’s liabilities divided by the total number of shares outstanding.

Closed-end funds and ETFs trade on exchanges with transactions occurring at a market value. The market value is an arbitrary price that is determined by market participants. When the fund trades above its last quoted NAV it is trading at a premium. When it trades below its last traded NAV it is trading at a discount. Fund companies often provide historical records of a fund’s premium and discount trading.

Discount Profits

A fund trading at a discount to NAV offers an opportunity to profit. Fund’s can trade at a discount for many reasons. Closed-end funds tend to trade with higher volatility from their NAV than ETFs because ETFs have authorized participants that actively follow the shares and take action to reconcile the price in the open market when it deviates from the NAV. Closed-end funds do not have such mechanisms and offer greater opportunities for arbitrage.

In many cases a premium or discount may be due to slight variations in the market pricing of the securities within the fund. The NAV is calculated once per day while the securities trade nearly 24 hours a day around the world. A discount signals that market investors find the securities in the fund to be valued below their comprehensive NAV value. This can occur throughout the day from bid and ask spread variance. The price of underlying securities may also be falling. Additionally, market news can also effect the price of securities before it is factored into the next NAV.

Closed-end fund values typically do not deviate far from their NAV since the funds are backed by their underlying holdings. Fund managers can buy back shares to restore the fund’s NAV. If a discount does occur, investors can profit from the discounted price and also gain yield benefits from a lower price on income paying securities.

Most closed-end fund managers report both the day’s market price and NAV in their marketing materials. They also often provide historical records of premium and discount market levels versus NAV. The Guggenheim Enhanced Equity Income Fund provides one example. On December 13, 2017 the fund’s market price was $8.97 versus the NAV price of $9.15. The Fund reported a -1.97% discount. As of December 13, it also reported a 52-week average discount of -4.04%.

  1. Premium to Net Asset Value

    Premium to net asset value (NAV) is a situation where the value ...
  2. NAV Return

    The NAV return is the change in the net asset value of a mutual ...
  3. Investment Fund

    An investment fund is the pooled capital of investors that enables ...
  4. Discounting

    Discounting is the process of determining the present value of ...
  5. 1%/10 net 30

    1%/10 net 30 is a way of providing cash discounts on purchases, ...
  6. Net Asset Value - NAV

    Net Asset Value is a mutual fund's assets less its liabilities, ...
Related Articles
  1. Financial Advisor

    Using Closed-End Funds To Build Your Core At A Discount

    Closed-end funds offer portfolios a chance to buy assets at discounts to intrinsic values. This is most apparent in the blue-chip stock space.
  2. Investing

    Mutual Fund Vs ETF: Which is Right For You?

    Want to invest but don't understand the difference between investment products? Here we explain ETFs vs. Mutual Funds and which is right for you.
  3. Investing

    How to Calculate the Value of an ETF

    An ETF is a good way to get broad exposure without taking on specific risk, but calculating performance may be a bit tricky.
  4. Investing

    4 Factors to Know About Money Market Reform in 2016 (FII, BAC)

    Learn more about the implementation of the money market fund reform, including how it impacted individual and institutional investors.
  5. Investing

    Mutual Fund 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. Investing

    What is a Discount Broker?

    A discount broker is a stockbroker who carries out "buy" and "sell" orders at a reduced commission compared to a full-service broker, but provides no investment advice.
  7. Investing

    Closing Mutual Funds: Investment Protection Or Trap?

    Discover the characteristics of closing funds, the reasons why they close and key factors to consider.
  8. Investing

    Funds That Boost Income With Covered Calls

    While options can be used as a vehicle for high-risk speculation, they can also be used as part of more conservative strategies.
  1. How Do You Find Out the Price of a Mutual Fund?

    The easiest way to find out the price of a mutual fund is to look at its net asset value (NAV). Read Answer >>
  2. What are the differences between closed-end and open-end investments?

    Learn what the primary differences are between open-end investments and closed-end investments, and the implications for ... Read Answer >>
Trading Center