Knowing Your Net Asset Value (NAV)

The net asset value of a mutual fund is the price, per share, of the fund. It can be calculated by taking the sum of all the securities in a portfolio, less any liabilities, and dividing it by the number of shares outstanding in the fund. When you are invested in a mutual fund, the net asset value of your shares is the actual ownership stake you have in the fund. While this is a useful indicator, it does not truly represent the profitability of a mutual fund.

Recording Net Asset Value

Net asset value is calculated for every mutual fund on a daily basis. At the close of the market, the current value of a portfolio's underlying holdings will be totaled, liabilities subtracted, and the remaining sum split between the shares. This is the number an outsider will see when determining the price per share of a mutual fund. It is listed on the exchange, and it may also be summarized in a prospectus for the fund. The prospectus may further divide the net asset value into various classes of share holders, but this is dependent on the style of the individual fund.

Using Net Asset Value

Net asset value can also be called price. Price and value are not actually the same thing, since value is a measure of the worth of an asset and price is a measure of how much people are willing to pay for it. However, with a mutual fund, the value of the underlying shares is more important than the perceived value of the fund as a whole. A purchaser buys shares in the fund based on the value the securities in the fund's portfolios are trading at. On the day a purchaser buys shares, they may not know the exact net asset value paid. This happens because the purchase is processed the next day, based on the net asset value recorded during the actual day of purchase. 

Close-End Funds and ETFs

Close-end funds and exchange traded funds trade like stocks, instead of mutual funds. They do not have a net asset value made up by the sum of their parts. Instead, they have their own value on the marketplace based on how much investors are willing to pay to purchase shares in the fund. The market value of the fund is more important than the net asset value, and it is possible for these funds to trade above or below their net asset value as a result. Buying one of these funds when the market value is lower than the net asset value is typically the investor's aim.

Net Asset Value and Profitability

The net asset value of a mutual fund should not be confused with the profitability of that fund. Mutual funds generally pay out income and capital gains immediately. This means the net asset value of a mutual fund remains fairly consistent over a given period of time. As a result, using net asset value to measure the profitability of a mutual fund is not actually a good measure.

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