Most industry definitions of “net asset value,” or “NAV”, do anything BUT make it easy for the average investor to understand. As soon as you start thinking about calculating a fund’s assets relative to its liabilities and the number of shares outstanding, your eyes just may start to glaze over! Fortunately, there’s a much simpler way to look at NAV and how it affects your investment – which is, after all, the most important thing most of us need to know.
Don’t worry about how NAV is computed right now. Just think of it as the price you pay for one share of a mutual fund at a particular point in time. Thus, if you put $5000 into the Acme Growth and Income Fund on Monday, when the NAV is at 13.02, you will be buying 384 shares of the fund. The next week you look at the paper and see that the NAV has risen to 13.12. You know you’re ahead. . . and if you multiply the number of shares you bought (384) by the new NAV (13.12) you’ll see just how much you’re ahead by (in this case, you’d end up with 5038.08, so you’d be ahead by 38.08. Conversely, let’s say the market goes down and the fund’s NAV falls. Just multiply the number of shares you bought by the new NAV and you’ll see how the value of your account has changed.
Now, I’ve really simplified things here, because I haven’t figured in sales charges and other fees that would affect the return on your investment, and those certainly can make a difference. But they would get in the way of showing you how NAV works on its most basic level. I also haven’t mentioned that these days, you’d never need to do the math – because most mutual fund web sites can show you the daily value of your account. Still, explaining it like these terms is the best way I know to help people understand the basic concept.
If you’re trying to understand WHY a fund’s NAV moves up or down every day, that’s when you need the more standard definition. For most funds, the NAV is calculated in two steps.
– First, the value of all the securities the fund owns as of the close of the markets each day is added to other assets such as cash, and any liabilities the fund has are subtracted from it.
– Then, the resulting figure is divided by the number of shares the fund has outstanding as of the end of the day.
Since securities prices change daily, and a fund’s liabilities (such as payments for unsettled trades, redemptions, dividends and capital gains distributions) will also change frequently, you can see that this figure is going to be different every day. Most funds issue and redeem shares daily so this figure will change as well. When a fund receives interest payments on the bonds it owns, or dividend payments on the stocks it owns, the NAV will rise to reflect this. When a fund pays out a distribution to shareholders, the NAV will fall – and if you are concerned about what seems to be a substantial decline in your fund’s NAV, you should check to see if it’s just paid a distribution before you conclude that you’ve actually lost money!
Hopefully, this has shed some light on a formerly difficult subject. Happy investing.