Calculating Net Asset Value

Net asset value or NAV is a most common term used to describe the value of a mutual fund. But, many mutual fund investors do not exactly understand the real meaning of the term. However, before investing in a mutual fund, it is very important to know the way in which a mutual fund’s NAV is calculated.

Calculating the net asset value of a mutual fund is really simple. When the current market value of the fund’s net assets on that particular day are divided by the number of outstanding shares, the resultant value is the NAV. The total net assets of a mutual fund include all the securities held by the fund minus any liabilities. Net asset value per share has to be calculated daily. Illustrated below is a simple example to understand the NAV calculation. If the total value of assets in a fund is equal to $5 million and the fund has one million shares in the portfolio, then the NAV or the price per each share is $50.00. Net asset value can also be simply described as the price at which shares may be purchased or sold at a particular time.

According to financial experts, NAV is never a right index to judge the performance of a mutual fund. This is because the NAV is highly influenced by the fund distributions made by the fund manager. As per law, every mutual fund has to distribute its realized net gains to the investors in the form of dividends. Whenever any dividend is distributed, the value of the NAV declines on a per-share basis. In many cases, investors prefer to reinvest the dividends or fund distributions rather than receiving cash. As a result of this option, investors can obtain additional shares using those distributions. And also, there would be no decrease in the total value of the fund investment, even though the NAV declines.