Net asset value is a crucial financial measure used across a broad range of industries like banking and investments. However, this concept can be tricky to grasp.
Let’s break down the core components of net asset value, how it relates to the balance sheet and real-world applications in the financial sector.
Definition of Net Asset Value (NAV)
NAV stands for Net Asset Value. It’s the value of an investment fund’s assets, minus its liabilities.
In a nutshell, it’s how much money you’d get if you sold everything in the fund and paid off all debts.
The NAV is calculated each business day using the closing price of each security in the fund.
The term “net asset value” can also refer to the per-share value of a closed-end fund, which trades independently of its underlying portfolio.
The NAV of an exchange-traded fund (ETF) is calculated in a similar way as an open-end fund, but it will not always be identical to the ETF’s trading price on the market due to arbitrage activity.
How to Calculate Net Asset Value
Net Asset Value (NAV) is a key indicator of how a mutual fund is performing, and the metric can be used to compare the value of one fund against another.
It’s important to know how NAV is calculated and what it means for you as an investor.
For example, assume that Fund A has $10 million in assets, $5 million in liabilities, and 1 million shares outstanding. The NAV calculation would be:
$10 million in assets – $5 million in liabilities = $5 million net assets / 1 million shares = $5 net asset value per share
Net Asset Value vs Market Price
Net asset value is the price of a mutual fund as determined by its portfolio holdings and expenses, while the market price is the price at which a mutual fund trades on a stock exchange.
The net asset value is calculated once daily, usually after the market closes. When a mutual fund’s market price is higher than its net asset value, it is said to be selling at a premium; when it is lower, it is said to be selling at a discount.
A fund that sells at a discount may be considered undervalued, but this depends on whether its prospects are good. If a fund has most of its assets in securities that are not doing well, then it may make sense for the fund to sell at a discount because it deserves to.
However, if the fund has solid holdings that are temporarily down in price, then it may make sense for the fund to sell at a premium because the market will eventually catch up with its true value.
Market prices can also deviate from net asset values due to investor sentiment or trading patterns.
While stocks vary in how they calculate their net asset value, the net asset value is a good way to measure how much investors are putting into a company.
Net asset value (NAV) is a measure of the worth of a company’s assets. It is a measure of the total equity return to the investors at market price, giving a better idea if the share price is under or overvalued relative to its net intrinsic value.