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What is Net Asset Value (NAV)?

Wednesday, December 26, 2018 | MarketBeat Staff
What is Net Asset Value (NAV)?

Summary - Net asset value (NAV) is a metric that’s used to compare mutual funds with one another. Mutual funds may share a common investment objective, but depending on how the fund manager selects the underlying securities, the value of the fund may be very different. Net asset value is also important because movement in the price per share does not happen in real time as is the case with stocks. Instead, price changes are reconciled at the end of a trading day based on a change in the fund’s assets and liabilities. For this reason, a fund’s NAV is typically pretty close to, if not identical to, the market price per share. 

Here is the formula used for NAV calculation:

Total value of fund assets – total value of fund liabilities/total number of fund shares outstanding 

The net asset value gives investors an indication about a fund’s valuation in comparison to funds with a similar objective or with an industry benchmark like the S&P 500 Index. In reality, a fund’s net asset value is more an indication of its intrinsic value because funds that have been in existence longer will probably have more assets, but may not necessarily be more valuable than a fund that has opened more recently. 

Although net asset value is an important comparison tool, it should not be the only metric used when deciding to buy or sell a particular fund. For that, investors should pay close attention to a fund’s annual return as well as any expenses that are associated with the fund as these are likely to have a much greater impact on the fund’s performance over time. 


When you’re comparing two items, it’s common to hear the colloquial expression “are you comparing apples to apples?” When investing in stocks, it’s common to look at things like market capitalization, share price, and earnings per share so that you are comparing companies of similar size. Investors may also take a look at different sectors to see how a stock compares not only to the broader market but to its specific niche.

It’s a little different for mutual funds. In the first place, mutual funds may have similar objectives, but the composition of the underlying funds may be very different. Mutual funds are also traded differently. Instead of having share price changes that happen in real time, like stocks, mutual fund prices are reconciled at the end of every day based on a change between assets and liabilities. To help manage this, mutual funds require a mechanism from which to set the market value for a fund’s shares. This is done by calculating a fund’s net asset value (NAV). 

This article will give you an in-depth look at net asset value including a definition, an explanation of why it’s important, and a breakdown of the individual components that make up a fund’s NAV. The article will also discuss how the NAV is similar, but different from a fund’s market value, why it is only applicable for open-ended funds and some of the limitations of net asset value.

What is Net Asset Value (NAV)?

Net asset value is the value of a fund’s assets minus its liabilities (i.e. net assets) relative to their outstanding shares. It is one measurement that helps to determine if a particular fund is overvalued or undervalued. It is also one way, though certainly not the only way, to compare one mutual fund with another. 

Why is net asset value necessary? 

A mutual fund or ETF operates when a large volume of investors contribute money (i.e. invest) in the fund. The fund will use this investment capital to buy shares of stock or other securities that fit the objectives of the fund (i.e. small cap, aggressive growth, technology, etc.). When an investor puts money into a mutual fund, they are buying shares in proportion to their purchase that they can sell at a later date. This is similar to purchasing a stock. However, the difference arises in that a mutual fund is made up of a basket of securities, each of which may have a different market value. 

This is where it’s important to understand the difference between how shares of individual stocks and shares of mutual funds are traded. Stocks are traded in real time and price changes can happen literally every second. Mutual funds, by contrast, are not traded in real time, but rather the per share price of a fund is calculated at the end of each day. Therefore, there has to be some sort of mechanism to set the market price of the fund. This is where net asset value, or NAV, comes in. Using the NAV formula, the price of a mutual fund can be set at the end of each business day based on the net assets (total assets – total liabilities) and the number of outstanding shares. 

The formula for NAV is: 

Total value of assets – total value of liabilities/total number of outstanding shares

In this way, the NAV price is typically very close if not identical to a fund’s market price. Let’s look at an example. At the close of trading on November 26, the Technology Select SPDR Fund (XLK) had net assets of $18,558,710 million and 283.26 million outstanding shares. Its NAV was $65.52 which corresponded to their stock price at the opening of trading. 

Breaking down the NAV formula

The three components of the net asset value formula are a fund’s assets, its liabilities and the number of outstanding shares. 

Assets – A mutual fund’s assets include:

  • The total market value of the fund’s investments based on the closing prices of the securities inside the fund’s portfolio. 
  • Any cash or liquid assets held by the fund are recorded as cash or cash equivalents.
  • Accounts receivable such as dividend payments or interest payments that apply for that day.
  • Any accrued income defined as money earned by the fund, but that has not been received. 

The sum total of all of these items makes up the total assets component of the NAV formula. 

Liabilities – a mutual fund’s liabilities include:

  • Money that the fund owes to a lending bank.
  • Pending payments and various charges or fees that the fund owes.
  • Foreign liabilities this can take the form of shares issued to non-residents, pending income payments or dividend payments for non-residents or proceeds from sales that are pending repatriation.
  • Any accrued expenses such as salaries utilities, operating expenses, etc. 

These liabilities can either be short-term or long-term depending on when they are scheduled to be paid, but all fit under the category of liabilities. 

Outstanding shares – these are simply the number of shares that a fund has issued which can be bought or sold by investors. 

Why is NAV important? 

When comparing the value of two companies, investors can compare share prices to get an indication of the value of one company to another. For a mutual fund, the net asset value plays this comparison role, allowing investors to get an indication of how much one share of a mutual fund or ETF compares to another or to an industry benchmark such as the S&P 500 index. 

How is net asset value different from market price?

For open-end mutual funds, the share price is based on net asset value. It’s important to note that while NAV is set as of a particular business (trading) date, the buy and sell orders are processed according to the cutoff time at the NAV of the trade date. The cutoff time is set by regulators. Since the NAV between one day and the next can vary, it’s important for investors to know when the cutoff for a trading day will be.

For example, let’s say a fund has a NAV of $15 and the regulators set the cutoff time for a particular trading day at 1:30 p.m. Any buy and sell orders that are processed before 1:30 are processed at the $15 NAV. However, any orders processed after the cutoff time will be processed at the next day’s NAV. If the NAV changes, the order will be processed based on the next day’s NAV. 

There are two exceptions to this. One applies to exchange-traded funds and the other applies to closed-end funds. Unlike other open funds, the net asset value of exchange-traded funds (ETFs) can vary significantly from its market price. This is due to the fact that ETFs are bought and sold based on supply and demand. This means that the market value of a share may go above or below a fund’s NAV. However, while the price may be different it is usually fairly close to the NAV. 

The other difference is with closed-end funds. A closed-end fund limits the number of shares that can be bought or sold. For that reason, shares of a closed-end fund will be bought and sold based on market prices that are determined by competitive bids on stock exchanges. This frequently results in closed-end shares selling at a discount to what the NAV might be. This means that the investors can buy shares in the securities that make up the fund at a value that is above the fund’s market price. 

Is it better to buy a fund with a higher or lower NAV?

A fund’s NAV is really a measurement of the fund’s intrinsic value. This means that whether a fund has a higher or lower NAV relative to another fund may not be relevant provided the two funds are investing in similar securities. For example, if one fund has been in existence longer than another, it’s reasonable to assume that fund would have a higher NAV. It may be more profitable to invest in the newer fund offering if you have reason to believe that it will be well managed and attract other investors. On the other hand, a fund with a higher NAV may be an example of getting what you pay for. It may be more profitable for you to own shares of the higher priced fund in the long run.

Limitations of net asset value

The primary limitation of using net asset value to determine the value of a mutual fund is that a mutual fund will typically pay out virtually all of its income and capital gains to shareholders. In this way, when making a determination about a fund’s performance, investors are advised to look at other metrics, most notably the fund’s annual return as well as any fees and expenses charged by the fund. 

Some analysts will also point out, correctly, that because a fund may distribute capital gains to shareholders, they will reduce their NAV which means that investors should pay more attention to long-term changes in a fund’s share price. 

The bottom line on net asset value (NAV)

Net asset value (NAV) is a way for investors to compare the performance of mutual funds. Because the NAV of a mutual fund is closely tied to the market price of its shares, a NAV is useful to see if a particular fund may be overvalued or undervalued.

NAV is calculated by dividing a fund’s total assets (the difference between its assets and liabilities) and dividing it by the fund’s total outstanding shares. Unlike shares of stock, shares of mutual funds do not trade in real time but are reconciled at the end of a trading day. Trades executed before the cutoff time are priced at that day’s NAV. Trades executed after that time are priced at the NAV for the following day. 

In reality, there is usually not that much difference between a fund’s NAV and its market price. However, the change may be a bit more significant for exchange-traded funds (ETFs) or with closed-end funds. In general, investors should pay more attention to factors like the fund’s annual return and fees and expenses in addition to the NAV when evaluating a fund. Newer funds will have fewer investor dollars and will generally carry a lower NAV. More established funds will have a higher NAV but that may not mean they are a better value. 

Like many metrics, NAV should not be an investor’s only tool for comparing mutual funds. However, when viewed over time, an investor can pick up patterns that may provide more information about how well the fund is managed. 

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