Net Asset Value (NAV)

When working with mutual funds, or an investment fund, investors will oftentimes work with the net asset value or NAV to estimate the market value of the mutual fund. With the NAV, the investor will be able to determine if a fund is either undervalued or overvalued.

There are two separate metrics of calculation to take into consideration here.

The first is the Net Asset Value of a mutual fund as a whole, whereas the second is the Net Asset Value Per Unit of a mutual fund.

These two are calculated as follows:

NAV = Fund Assets – Fund Liabilities

and

NAV Per Unit = Fund Assets – Fund Liabilities / Number of Outstanding Units

Seeing as Net Asset Value is commonly expressed in price per unit or share, the NAV must be divided by the amount of outstanding shares.

Net Asset Value example

If a mutual fund has total holdings of $150 million, with an estimated $40 million in liabilities, the fund will have a NAV equal to $110 million.

NAV = $150 million – $40 million = $110 million

To calculate the price per unit, we can now divide the NAV by the total number of units outstanding.

Assuming the mutual fund has around 1.4 million units (shares) outstanding, then the NAV per unit or share is equal to $78.57 or $78 rounded.

NAV Per Unit = $110 million / 1.4 million = $78 per unit or share.

Why the NAV is important

  • To help establish an investment strategy based on the mutual funds’ performance
  • To determine how portfolio values will fluctuate after each trading day.
  • When the portfolio value increases, the NAV increases.
  • When the portfolio value decreases, the NAV decreases.
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