NAV Return

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21 Aug, 2024

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The net asset value return refers to the change in the value of an investment over a period, typically a mutual fund or ETF. Therefore, this aims to provide investors with a valuable tool to assess the performance of their assets, make informed decisions, and monitor their progress toward their financial goals.

In other words, the NAV return determines the company's net worth change, whose stock is included in the respective fund. It is derived through the net asset value of these securities as reported at the closing of each trading day. Moreover, it is vital to note that NAV return does not include expenses, such as management fees or transaction costs, associated with the investment.

What Is NAV Return?

Net Asset Value (NAV) return is the percentage increase or decrease in the net assets of a mutual fund, ETF, or open-ended fund over the period
It is different from market return which is determined through the premium or discounted price of the fund above or below its NAV; Also, it varies from the total return, I.e., the overall percentage gain over the initial value of the fund.
To calculate the NAV return, you need the NAV at the beginning and end of the investment period. And also information on any distributions received and reinvested during that period.

NAV Return Explained

Net asset value return definition refers to the change in the net worth of the companies whose securities are bundled in a mutual fund or ETF over the period. As we know, a company's stock is purchased at its net asset value. Since a fund comprises various shares or securities of different companies, gauging their aggregate NAV becomes crucial for mapping the actual valuation of the general fund in the books.

Moreover, the NAV return considers changes in the NAV itself and any reinvested distributions, such as dividends or interest income, during the investment period. Furthermore, determining the best NAV Return depends on individual investment goals, risk tolerance, and investment time horizon.

Therefore, this return is usually evaluated at the end of every trading day. Since the market value of the assets is volatile and changes every day. Thus, to maintain the real-time valuation, the fund accountant or manager computes the NAV of the fund at each day's closing. Also, they compare this NAV with the previous day's net asset value to figure out the positive or negative change in the matter.

Additionally, the NAV return provides a comprehensive measure of the investment's performance, capturing both capital appreciation and the impact of reinvested distributions. Hence, the discount to NAV return measures the performance of the investment relative to its net asset value.

Hence, it is calculated by comparing the change in the market price of the investment over a specific period to the change in its NAV over the same period.

Formula

The net asset value return is the percentage change in the NAV compared to the previous period. It is mathematically represented as:

NAV Return = * 100

Note: In the above formula, the NAV signifies the net asset value per share.

The NAV per share is computed as follows:

NAV = (Fund Assets - Fund Liabilities) / Number of Outstanding Units

Here, the total assets include the cash and cash equivalents and the current value of securities. However, the distribution of dividends, capital gains and interests are considered under total assets only if these are reinvested. Also, the total liabilities include all the short-term and long-term liabilities.

Calculation Example

Let us take some examples to understand the NAV return calculation:

Example #1

Suppose the net asset value breakdown of the ABC fund is as follows:

Security	Assets on Day 1	Assets on Day 2	Liabilities on Day 1	Liabilities on Day 2
P	$200000	$210000	$120000	$125000
Q	$450000	$440000	$340000	$310000
C	$170000	$190000	$120000	$130000
Total	$820000	$840000	$580000	$565000

If the number of units outstanding is 41,000 on Day 1 and 42000 on Day 2, evaluate the NAV return of the ABC fund on Day 2, I.e., the current period.

Solution:

Previous NAV = ($820,000 - $580,000) / 41,000 = $5.85

Current NAV = ($840,000 - $565,000) / 42,000 = $6.55

NAV Return = * 100 = 11.86%

Example #2

Suppose a mutual fund comprised of 30 different securities has the following total assets and liabilities summary:

A total asset on the previous trading day’s closing, including the dividends and interest distribution, was $470,000,000.
Total liabilities on the previous trading day's closing were $260,000,000, including the short and long-term liabilities.
Hence, total assets on the closing of the current trading day are $475,000,000.
Therefore, total liabilities on the closing of the current trading day is $257,000,000.

Find the NAV return if the previously outstanding shares were 1,000,000 and the current outstanding share are 1,001,000.

Solution:

Previous NAV = ($470,000,000 - $260,000,000) / 1,000,000 = $210

Current NAV = ($475,000,000 - $257,000,000) / 1,001,000 = $217.78

NAV Return = * 100 = 3.7%

NAV Return vs Market Return vs Total Return

Net asset value return differs from the fund's market or total return. While the former evaluates the change in the book value of the companies whose stocks are included in the mutual fund, the other two are driven by market forces.

Given below are the various other points of distinction among these three forms of a fund's returns:

Basis	NAV Return	Market Return	Total Return
Meaning	It is the percentage change in the value of a fund's net asset in a given period.	The fund's return is determined as the change in its market price over the period.	A Total return is the overall gain from an investment evaluated as the percentage of total revenue compared to the initial fund value.
Premium or Discount	Not applicable	Reflects the premium or discounted value from the NAV return	Not applicable
Components	Total assets, total liabilities and number of outstanding units	The market price of the fund and the given period	Closing and opening price of the fund, earnings and amount invested
Frequency of Computation	Each trading day	Daily, monthly or yearly	Yearly

Frequently Asked Questions (FAQs)

1. What if the NAV return is negative?

Daily, the NAV return of a fund can rise or fall, I.e., it can be positive or negative. Thus, a negative NAV return indicates the poor performance of the mutual fund or ETF on that particular trading day. However, the absolute NAV return of a fund cannot be negative.

2. Can NAV return predict future performance?

This return is based on historical performance and does not guarantee future results. While it provides insights into an investment's past returns, it should not be solely relied upon as an indicator of future performance. Other factors, such as market conditions, economic factors, and fund management, can influence future returns.

3. Can NAV return be compared across different funds?

Yes, these can be used to compare the performance of different funds. Investors can analyze these returns to assess which funds have generated higher returns relative to their investment period. However, it's essential to consider factors such as the fund's investment strategy, risk level, and benchmark performance when comparing NAV returns.