What Is Net Asset Value – NAV?


The net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. Most commonly used in the context of a mutual fund or an exchange-traded fund (ETF), the NAV represents the per share/unit price of the fund on a specific date or time. NAV is the price at which the shares/units of the funds registered with the U.S. Securities and Exchange Commission (SEC) are traded (invested or redeemed).

Understanding Net Asset Value (NAV)

Theoretically, any suitable business entity or financial product that deals with the accounting concepts of assets and liabilities can have a NAV. In the context of companies and business entities, the difference between the assets and the liabilities is known as the net assets or the net worth or the capital of the company. The term NAV has gained popularity in relation to the fund valuation and pricing, which is arrived at by dividing the difference between assets and liabilities by the number of shares/units held by the investors. The fund’s NAV thereby represents a “per-share” value of the fund, which makes it easier to be used for valuing and transacting in the fund shares.

The Formula for Net Asset Value (NAV)

The formula for a mutual fund's NAV calculation is straightforward:

NAV = (Assets - Liabilities) / Total number of outstanding shares

The correct qualifying items should be included for the assets and liabilities of a fund.

Basic Working of a Fund

A fund works by collecting money from a large number of investors. It then uses the collected capital to invest in a variety of stocks and other financial securities that fit the investment objective of the fund. Each investor gets a specified number of shares in proportion to their invested amount, and they are free to sell (redeem the value of) their fund shares at a later date and pocket the profit/loss. Since regular buying and selling (investment and redemption) of fund shares start after the launch of the fund, a mechanism is required to price the shares of the fund. This pricing mechanism is based on NAV.

NAV for Mutual Funds

Unlike a stock whose price changes with every passing second, mutual funds don’t trade in real-time. Instead, mutual funds are priced based on the end of the day methodology based on their assets and liabilities.

The assets of a mutual fund include the total market value of the fund's investments, cash and cash equivalents, receivables and accrued income. The market value of the fund is computed once per day based on the closing prices of the securities held in the fund's portfolio. Since a fund may have a certain amount of capital in the form of cash and liquid assets, that portion is accounted for under the cash and cash equivalents heading. Receivables include items such as dividend or interest payments applicable on that day, while accrued income refers to money that is earned by a fund but yet to be received. Sum of all these items and any of their qualifying variants constitute the fund’s assets.

The liabilities of a mutual fund typically include money owed to the lending banks, pending payments and a variety of charges and fees owed to various associated entities. Additionally, a fund may have foreign liabilities that maybe the shares issued to non-residents, income or dividend for which payments are pending to non-residents, and sale proceeds pending repatriation. All such outflows may be classified as long-term and short-term liabilities, depending upon the payment horizon. The liabilities of a fund also include accrued expenses, like staff salaries, utilities, operating expenses, management expenses, distribution and marketing expenses, transfer agent fees, custodian and audit fees, and other operational expenses.

To compute the NAV for a particular day, all these various items falling under assets and liabilities are taken as of the end of a particular business day.

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