Net Asset Value

Net asset value (NAV) of an investment fund is the amount by which the fund's assets exceed its liabilities. NAV is normally calculated per share by dividing excess of the market value of fund assets and the fund liabilities by total outstanding units of the fund. Such calculation is carried at the end of each trading day.

An investment vehicle such as a mutual fund, an exchange-traded fund (ETF) or a real estate investment trust (REIT) pools investment money from its unit-holders and invest those on their behalf. The value of a unit of the investment fund (i.e. its own share) depends on the weighted average value of the underlying investments that the fund has made and the liabilities it has incurred. This value is called NAV.

NAV has two important functions:

  • in case of an open-end mutual fund, it is the price at which the units are traded between the fund and the unit-holders i.e. the fund issues and buys back its shares/units at their net asset value plus any fees; and
  • it helps track the performance of a fund because shares of other investment vehicles like closed-end funds and exchange-traded funds (ETFs) trade close to net asset value most of the time.

Formula

Net asset value per unit can be calculated using the following formula:

$$ NAV=\frac{Fund\ Assets\ -\ Fund\ Liabilities}{Number\ of\ Units\ Outstanding} $$

Where fund assets represent the total market value of the fund assets including investments (stocks, bonds, real estate, etc.), receivables, accrued income and cash and cash equivalents, fund liabilities include any obligation on short positions, operating and general and admin expenses, management fee, etc. on accrual basis.

Example

Topline Asset Management started its Global Balanced Fund on 1 January 2013 with $50 million in capital. Following are the details of the fund's assets and liabilities at the end of first year.

USD in thousand
Local equity9,000
Global equity15,000
Local bonds8,000
Global bonds12,000
US Treasury5,000
Preferred stock10,000
Cash2,000
 
Management fee payable500
Accrued expenses200

The fund initially had 2 million shares. It issued new shares and redeemed some old ones during the year such that its outstanding shares as at the year end are 2.2 million.

Find the fund's net asset value.

Solution

USD in thousand
Local equity9,000
Global equity15,000
Local bonds8,000
Global bonds12,000
US Treasury5,000
Preferred stock10,000
Cash2,000
Total assets61,000
Management fee payable(500)
Accrued expenses(200)
Net assets of the fund60,300

Given the total net assets of the fund and the number of outstanding units, we can work out the NAV per unit of the fund as follows:

$$ NAV=\frac{$60,300,000}{2,200,000}=27.41 $$

It means that the fund will redeem its share at $27.41 less fee if any, if the investor intends to surrender them.

Written by Obaidullah Jan, ACA, CFA and last modified on