To frame the importance of your net asset value (NAV), let’s first define the term. Your NAV is the total of your asset’s worth—usually in reference to mutual funds and exchange-traded funds (EFTs)—minus its liabilities. As these funds have several, complex moving parts, a fund’s NAV tells us the base value of its underlying assets. NAV represents the price per share (or unit) of your mutual or ETF fund, which is typically calculated daily at the close of the market.
Why is it important to understand your fund’s NAV?
By understanding how your funds’ net values are calculated, you can more easily assess the growth of a fund over time. Depending on how active you are as an investor, you can also use a NAV to identify potential investment opportunities. In this article, we’ll explain how your fund’s NAV is calculated and what to consider when analyzing the information.
The Formula to Determine a Net Asset Value
The NAV of your fund can be calculated by subtracting its liabilities from its assets and then dividing that number by the total number of outstanding shares.
Net Asset Value = (Assets – Liabilities) ÷ Outstanding Shares
What to Consider When Analyzing Your Fund’s Net Asset Value
When analyzing the NAV of your mutual fund or exchange-traded fund, consider that:
- A fund’s assets include the value of its investments, cash and equivalents (liquid assets), receivables, and accrued income.
- A fund’s liabilities include the charges and fees owed, money owed to lending banks, and pending expenditures.
- Mutual funds do not trade and update in real-time, unlike stocks. The price of a mutual fund is dependent on the previous day’s numbers. The total NAV of a mutual fund is determined at the close of the market.
- ETFs do act more like stocks in that they can be traded at a premium (above their actual NAV) or at a discount (below their actual NAV), allowing for potentially profitable trading. Like mutual funds, the NAV of an ETF is calculated daily at the market’s close—along with intraday NAV numbers being disseminated throughout the day.
How to Use a Net Asset Value
For active investors, knowing the NAV of an exchange-traded fund can help them to identify potentially beneficial trading opportunities throughout the day. However, for investors using a fund’s NAV to determine its profitability over time, they would compare the value over a long period of time. For example, they could compare the fund’s NAV on January 1st with the NAV on December 31st in the same year to determine how the fund performed.
It’s important to note that the NAV alone cannot tell an investor about the quality of an investment. In the same way that a higher stock is not better, a higher NAV does not indicate a better mutual or exchange-traded fund. Instead, the NAV analyzed over a period of time is a better indicator.
The Big Picture: Consult Your Advisor
Overall, the net asset value of a fund is only one of many factors used to analyze an investment. Your financial advisor can manage your investments and analyze their profitability over time, advising changes along the way. We work with you to understand your goals and build an investment portfolio to help you reach them. Contact Southwestern Investment Group today to schedule a consultation with an advisor near you.
