Every investor has seen the term Net Asset Value (NAV), especially if he invests mostly in mutual funds. But what NAV exactly is? Just like a package which contains food for example, records the net weight of its content, NAV does the same things with assets. Clearly, knowing the total weight of the box is of little use, since this weight takes also into account the weight of the package. Knowing the net weight of its content is what matters. Let us give a more formal definition. Net asset value of an investment company or a mutual fund, represents the market value of all its assets less the value of its liabilities (fees payable to the managers, loans to banks, etc). It is most commonly related to open-end funds, since their shares are issued and redeemed by the fund at prices equal to their Net Asset Value. On the other hand, closed-end funds are traded between investors at prices determined by the market, which may differ from their NAV.
If we divide the Net Asset Value by the total number of shares outstanding, we get the NAV per share. Let us be more precise by giving a numerical example: if a fund has assets worth $50 million and its liabilities worth $5 million, its NAV will be $45 million. Notice that this number changes daily, due to changes in the value of the mutual fund’s shares and/or the value of its liabilities. Suppose also that this particular fund issues 5 million shares. Then the Net Asset Value per share will be $9. An investor who wants to purchase a single share has to pay $10 plus some additional fees. If he wants to sell one share he will receive $10 dollars minus some additional fees.
It is important to note that in contrast to buying common stocks, when you want to invest in a mutual fund, you don’t purchase a specific number of shares, but rather you invest an amount of dollars, $5000 for example, and with this amount you get the number of shares that is determined by the NAV per share. So, for example, if the NAV per share is $50, you will get 100 shares (in reality you will get fewer shares due to the additional fees, which decrease your purchasing power). Another important fact is that you shouldn’t compare funds according to their Net Asset Value. Higher or lower NAV doesn’t mean better performance. In other words, the NAV of a mutual fund shouldn’t be used in the same way investors use the market price of a common stock to make their decisions. If 2 mutual funds have the same portfolio of securities, they are the same irrespectively of their NAV, which can be different between the two. Suppose for example, that you wish to invest $10000. Let Mutual fund’s A NAV per share be $10 and fund’s B NAV per share $20. Assume also that they have the same portfolio i.e., each security has the same percentage of wealth invested in it. Then you will get either 100 shares from fund A or 50 shares from fund B. If both mutual funds grow by 20% (since they have the same portfolio structure they will have the same growth), fund’s A NAV per share will become $12 and fund’s B NAV per share will become $24. So, you are going to gain 100*($12-$10) = $200 from fund A and 50*($24-$20) = $200 from fund B, which obviously are equal.
It is rather the structure of the mutual fund’s portfolio that matters. More specifically, what counts is the diversification of the portfolio, the quality of the securities that constitute the portfolio as well as the amount of fees the fund charges.
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If we divide the Net Asset Value by the total number of shares outstanding, we get the NAV per share. Let us be more precise by giving a numerical example: if a fund has assets worth $50 million and its liabilities worth $5 million, its NAV will be $45 million. Notice that this number changes daily, due to changes in the value of the mutual fund’s shares and/or the value of its liabilities. Suppose also that this particular fund issues 5 million shares. Then the Net Asset Value per share will be $9. An investor who wants to purchase a single share has to pay $10 plus some additional fees. If he wants to sell one share he will receive $10 dollars minus some additional fees.
It is important to note that in contrast to buying common stocks, when you want to invest in a mutual fund, you don’t purchase a specific number of shares, but rather you invest an amount of dollars, $5000 for example, and with this amount you get the number of shares that is determined by the NAV per share. So, for example, if the NAV per share is $50, you will get 100 shares (in reality you will get fewer shares due to the additional fees, which decrease your purchasing power). Another important fact is that you shouldn’t compare funds according to their Net Asset Value. Higher or lower NAV doesn’t mean better performance. In other words, the NAV of a mutual fund shouldn’t be used in the same way investors use the market price of a common stock to make their decisions. If 2 mutual funds have the same portfolio of securities, they are the same irrespectively of their NAV, which can be different between the two. Suppose for example, that you wish to invest $10000. Let Mutual fund’s A NAV per share be $10 and fund’s B NAV per share $20. Assume also that they have the same portfolio i.e., each security has the same percentage of wealth invested in it. Then you will get either 100 shares from fund A or 50 shares from fund B. If both mutual funds grow by 20% (since they have the same portfolio structure they will have the same growth), fund’s A NAV per share will become $12 and fund’s B NAV per share will become $24. So, you are going to gain 100*($12-$10) = $200 from fund A and 50*($24-$20) = $200 from fund B, which obviously are equal.
It is rather the structure of the mutual fund’s portfolio that matters. More specifically, what counts is the diversification of the portfolio, the quality of the securities that constitute the portfolio as well as the amount of fees the fund charges.
StockTradingCollege.com, Stock Trading and Investing for Beginners