The price of a fund’s share is stated as the Net Asset Value (NAV) for that fund. It means if NAV of a fund is $10, then you can buy a fund’s share for $10 each. It is widely used to refer to mutual funds. If you want to make better investment choices then you should be able to calculate it yourself. In this article, we will describe how to calculate net asset value by an easy method.
The net asset value is calculated daily to know at what price both buying and selling of a particular share can be done at the end of the trading day.
Method to calculate Net Asset Value: To calculate the NAV of a fund, the current market value of that particular share or net asset is needed. NAV is calculated by subtracting the liabilities from the fund’s securities. When the figure is obtained then it has to be divided by the total number of outstanding shares.
NAV is calculated in two steps:
- Present market value of net assets = securities – liabilities = A
- NAV = A / total number of outstanding shares.
For example, if the current market value of a fund is $100 and total number of shares the fund holds is 10 then,
NAV = $100 /10
Application of Net Asset Value: NAV is a good way to keep track record of price changes of your mutual funds. However it does not show the performance of the fund, since the NAV decreases every time when the fund distributes to shareholders. As it is needed by law of action, you need not worry if you see a small drop in the prices of your shares. Mutual funds are required to pay 90% of capital gains annually, so a drop in NAV is expected for some time.
Net asset value changes daily, which is why it cannot be a performance indicator. The share prices of mutual funds are based on their NAV. The price that investors pay to purchase mutual fund is equal to per share NAV and the fees that the fund has imposed on purchase. The price which an investor gets after redemption is equal to price per share NAV at the time of redemption and fees are deducted from it.
Open ended funds: The most common use of NAV is in the context of open ended funds. Shares and interests are not traded between investors in such funds. Instead of this, shares and interests are issued to each new investor and redeemed back to the fund when the investor withdraws.
Real estate investment trusts: NAV is a valuation index of real investment trusts (REITs). It is quoted on a ‘per investment unit’ basis. Here the value of shares is divided by the number of total outstanding investment units. The NAV index has the same meaning as the adjusted price to book ratio applied in the stock markets in which factors such as unrealized losses/gains of owned properties and brand values are reflected.
Variable annuity and variable insurance contracts: Variable insurance and variable annuity contracts are normally similarly structured to mutual funds, yet they can vary in value when markets fluctuate. Similar to the shares of a mutual fund, usually these insurance and annuity products issue units of ownership to policyholders in exchange of their investments.
NAV is one of the most widely misunderstood concepts of the financial world. The biggest mistake people make is they get confused and think NAV of a unit of a mutual fund as its stock price whereas a stock price is an indication of future prospects of a company.
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