Net Asset Value (NAV)

Net Asset Value (NAV) refers to the net value of an entity or equity obtained by subtracting the total value of its assets from the total value of its liabilities. It also indicates the per share or unit market value of securities like mutual funds, exchange-traded funds (ETFs), indexes, etc., on a given day.

Investors, traders, money managers, and investment businesses can use net asset value calculator to identify new investment opportunities and determine if a fund is overvalued or undervalued and how it affects the total return of their portfolio. Accordingly, the U.S. Securities and Exchange Commission (SEC) recommends that mutual funds and Unit Investment Trusts (UITs) calculate their NAV once every business day.

• Net Asset Value or NAV is the difference between the total value of assets owned and the total liabilities owed by a business or financial instrument divided by the number of outstanding shares.
• It represents the per share or unit market value of securities, book or equity value of a business, and the net value of a mutual fund and exchange-traded fund on a given day.
• The NAV is directly proportionate to the value of the securities. It fluctuates every day due to the change in the value of the fund’s assets, liabilities, and shares accessible at the end of a trading day.
• NAV helps investors, traders, money managers, and investment firms find new investment opportunities.

Net Asset Value (NAV) applies to any business entity or financial instrument having assets and liabilities. It is the difference between the fund’s total assets and the total liabilities and dividing it by the number of outstanding shares.

When calculated on a per-share or unit basis, it helps investors determine the return on their investments by the end of the trading day. It is the price at which they can buy, sell, or redeem shares in SEC-registered funds. However, investors need to have an investment account to calculate NAV. 

The NAV is directly proportionate to the value of the securities. It means as the value of the securities rises, so does the value of NAV, and vice versa. Since the value of the fund’s assets, liabilities, and shares is available at the end of a trading day, the NAV fluctuates every day. Therefore, it does not indicate how good or bad the fund is. Hence, investors should look at its annual returns before investing in a fund.

NAV represents the net value per share, book, or equity value of a business and the net value of a fund. It is deemed less important in industries where humans are valuable assets that cannot be mentioned on the balance sheet. For NAV, assets are anything related to monetary investment.

The standard for net asset value per share is calculated by applying the formula below:

NAV formula = Assets – Liabilities

Here,

• Assets include the total value of the securities owned by the business, and
• Liabilities include the full amount that the business owes and must spend to settle its loans and expenses

It also represents a financial instrument's closing market value at the end of a trading day.

The formula used to calculate the Net Asset Value per share for an investment fund is:

NAV = (Assets – Liabilities) / Total number of outstanding shares

Here,

• The total number of outstanding shares signifies the number of units constituting a fund.

Investment companies use this formula to determine the return investors are eligible to receive, depending on the number of shares/units of the fund they own.

Net asset value calculator is used as part of fund accounting, also referred to as securities accounting, investment accounting, and portfolio accounting. For a business, the difference between its total assets and liabilities results in its net asset or net worth. In this case, NAV is either equal to or close to the firm’s book value, equity value, or capital owned.

Let us understand the concept of net asset value per unit in depth with the help of a couple of examples.

Example #1

In mutual funds, the term 'mutual' signifies many investors investing in the same financial product, and a 'fund,' as already known, is where the investment is pooled together. Here, capital invested by investors is accumulated together. Therefore, it becomes crucial for each to calculate their returns at maturity based on the number of shares they own.

Mutual fund assets = Total market value of investments pooled together, cash, account receivables, cash equivalents, and accrued income

Mutual fund liabilities = Bank loans, debts, pending payments, and fees 

So,

NAV = (Assets – Liabilities) / Total number of outstanding shares

For example, Patricia invests in a mutual fund with 30,000 units. The value of fund assets is worth $20 million. The short-term and long-term liabilities are $2 million and $1 million along with other expenses, totaling $2 million. She wants to know the Net Asset Value of a mutual fund for 2,000 shares after the tenure ends, considering the market rates and conditions remain the same.

To calculate Patricia’s return, the first thing required would be to find out per share NAV:

              Therefore, {20,000,000 – (2,000,000+1,000,000+2,000,000)} / 30,000

               (20,000,000 – 5,000,000) / 30,000

               15,000,000 / 30, 000

               = $500

Since, the per unit price of the fund share is $500

Patricia’s NAV, therefore, would be = 500 * 2000

                                       = $1,000,000

Example #2

The NAV for ETFs is officially calculated every trading day. It is based on the value of the underlying assets at the closing trade hours as per different time zones. The details of the fund's holdings are provided every day. This transparent procedure makes the ETF the most common form of investment for individuals. Though NAV for mutual and ]closed-end funds are calculated daily, the portfolio holdings are revealed at the end of each quarter.

Like mutual funds, the NAV for ETFs is calculated on a per-unit basis, dividing the difference between the total assets and liabilities by the total number of outstanding units. In this case, however, investors can track their assets and liabilities and be prepared to receive the NAV concerning the same.

Net asset value calculator helps traders identify the anchoring point to know whether the market is favorable for trading. Aside from that, there are many benefits of calculating it, such as:

• Estimate the returns at maturity based on the per share or unit NAV
• Know the value per share of a mutual fund or ETF
• Analyze the daily performance of a fund and compare it to others
• Identify new investment opportunities
• Determine whether a fund is overvalued or undervalued and how this affects the portfolio's total return

This has been a guide to what is Net Asset Value. Here we explain its formula and discuss how to calculate, examples, and its importance in detail. You can learn more from the following articles –

• Asset Management
• Asset Protection
• Value Investing