NAV Explained

Net asset value measures how much an investment fund is worth after subtracting its total liabilities from its total assets. For example, if a mutual fund has $200 million in assets and $20 million in liabilities, its NAV is $180 million. NAV helps set the share price for various types of investment funds, including mutual funds

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Mutual funds, which sell shares directly to or redeem them from individual investors rather than trading on a stock exchange, must offer shares at a price determined by dividing NAV by the number of outstanding shares

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Since NAV shifts regularly, mutual funds are required to calculate prices daily. They typically do so after U.S. markets close. If an investor buys or redeems shares during the day, the price of those shares is set by the next NAV calculation. Share prices also include fees.

The market determines share prices for investment funds such as exchange-traded funds or ETFs, whose shares are traded on an exchange. That means a share could trade for more or less than the company’s net asset value per share. NAV, in this instance, can be used to determine if shares are trading at a premium (above NAV) or at a discount (below NAV).

As noted above, NAV is the difference between total assets and liabilities, making it similar to calculating an individual’s net worth or a company’s shareholder equity.

With a mutual fund, assets could include the value of its investments, cash, dividends and receivables. The fund’s liabilities may consist of what it owes for redeemed shares, unpaid management fees and other expenses.

A fund’s prospectus includes a statement of assets and liabilities and historical per-share prices.

The net asset value formula looks like this:

NAV = Total assets – Total liabilities

Then, to calculate the net asset value per share, divide the NAV by the number of outstanding shares.