Mutual Funds Net Asset value Explained

The Net Asset Value of a mutual fund is a simply the value of a single share of that fund. But what does that really mean? How is the Net Asset Value calculated?

A mutual fund is a type of investment company that pools money together from many investors and uses those collective assets to buy a wide range of equities. The specific investments made by the mutual fund depend on the specific goal and strategy of the fund, but typically will include various types of stocks, bonds and even money market purchases. The collective buying power gained by the money from many investors allows the fund to buy a wide range of investments, creating security in diversification.

If you add up the current market value of all assets in a fund and divide this by the number of shares the fund has outstanding, you get the Net Asset Value. For example, let’s say a fund owns ten million dollars in stocks of various companies. And the fund managers decide to break the assets in to one million pieces. Ten million divided by one million is $10 per share. This is the Net Asset Value of the fund.

It’s important to note that the Net Asset Value is recalculated each day as the value of the assets the fund owns changes each day in the stock and bond markets. If a bunch of stocks owned by the fund go up in the market, at the end of the day the fund’s Net Asset Value will be higher. Similarly, if the investments made by the fund loose value, the NAV will go down.

Also interesting to note is that the Net Asset Value is not always the best way to determine the performance of a mutual fund. During the course of a year, mutual funds buy and sell stocks. When they sell and make a profit, they incur what are known as “capital gains”. In addition, many stocks pay the owner of the stock a portion of their profits – these payments are known as “dividends”. Capital gains and dividends are added up by the fund and paid to anyone who owns shares of the fund in proportion to how many shares they have. When these distribution take place, the Net Asset Value of the fund will decrease. However, the total value of your investment will stay the same, even though the NAV has gone down.

Despite the potential confusion above, Net Asset Value is an easy way to track the general value of your investment in a mutual fund. On a day to day basis, it is by far the easiest way to track the performance of your mutual fund investment.