Net Asset Value – Definition

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Net Asset Value Definition

The net asset value (NAV) is defined as the net value (net worth or total value) of an entity. When the total value of a fund asset’s liabilities is subtracted from the total value of the fund’s assets, the Net asset value is realized. NAV also represents the per unit price on a fund or asset at a certain period.

More explicitly, net asset value = (value of fund’s assets – the value of its liabilities). The calculation of the NAV of an entity of asset is crucial, it reflects whether a fund in undervalued or overvalued which helps investors make investment decisions. NAV is often used in relation to open-end or mutual funds or exchange-traded fund (ETF).

A Little More on What is Net Asset Value

Mutual funds or exchange-traded fund (ETF) are registered with the SEC in the United States and there are certain regulations on the redemption of these funds. NAV reflects the price at which units of the registered funds are traded or redeemed.

The formula for calculating the NAV of a fund is; NAV = (Assets – Liabilities) / Total number of outstanding shares

The net asset value of an entity is the difference between its value of assets and liabilities. NAV can be calculated for any financial product that entails assets and liabilities. The “per-share” value of a fund is present by NAV and this is important for the valuation and transaction of funds.

Basic Working of a Fund

Typically, a mutual fund pools money from a large number of investors for the purpose of investing in financial instruments with high liquid cash or debt securities. Mutual funds are often operated or managed by professional fund managers who allocate the funds collected to investments that will yield a high rate of return. The price of each unit of fund is the NAV. based on the amounts invested, investors are allocated units of the mutual funds which they can freely trade at a specific time to realize profit. Investment and redemption of these funds are at a specified period and a mechanism (NAV) is needed to gauge the price of units/shares of the funds.

NAV represents a fund’s per share market value. Mutual funds are traded at a specific period based on their assets and liabilities. The net value of a mutual fund is realised when the total value of a fund’s asset liabilities is subtracted from the total value of the asset. The assets of a mutual fund include receivables, accrued income, the value of the fund’s investments, cash and cash equivalents, while the liabilities are debts to be repaid, pending payments, charges and fees on the assets. Cash outflows such as operational fees or expenses, utilities fees, management expenses and other outflows are the asset’s liabilities.

Example of Net Asset Value Calculation

In order to aid a better understanding of how the net asset value of a fund is calculated, the following example is vital.

Example: Assuming a mutual fund owns investments worth $100 in diverse societies in which the net worth is calculated for each asset based on the closing price for the day, and the same fund has $9 million of cash and cash equivalents and $5 million in total receivables.

If the accrued income for the day is $85,000 and the fund holds $15 million and $4million in short-term and long-term liabilities respectively. Also, if accrued expenses worth $10,000 and the fund has 5 million shares outstanding. The NAV is calculated as follows:

NAV = [($100,000,000 + $9,000,000 + $5,000,000 + $85,000) – ($15,000,000 + $4,000,000 + $10,000)] / 5,000,000 = (114,085,000 – 19,010,000) / 5,000,000 = $19.02.

Hence, the mutual funds will be traded at $19.02 per share.

NAV is usually calculated based on trade timelines usually referred to as the cutoff time of the trade date. Net asset value is calculated for individual asset based on the day’s closing prices for each individual asset. NAV is computed on a particular business date, this means that trading of assets (buying and selling) or units of mutual funds are processes based on the NAV of the trade date. Any transaction or orders that did not meet the cutoff time at the NAV of the trade date would be calculated as past of the NAV for the following business day.

Net Asset Value for Exchange Traded Funds

Exchange Traded Funds (ETFs) trade units of shares at a par value which can either be above or below that net asset value. When the shares are traded at a market value higher than the actual NAV, it is traded at a premium. It is however traded at a discount when the traded value is below the actual NAV. NAV for ETFs are calculated daily just like that of mutual funds. Active ETF traders use NAV calculation to make investment options that are most profitable to them.

The value of all assets in the fund subtracted from the asset’s liabilities, then divided by the number of outstanding shares in the ETF make up the NAV.

NAV is vital in the assessment of the performance of mutual funds, open-ended funds and Exchange Traded Funds (ETFs). Investors rely on NAV in assessing the performance of the funds they invest in, they also compare the performance of different funds based on their NAVs. Although, there are other ways to assess the performance of funds such as compounded annual growth rate (CAGR), NAV is effective in gauging the performance of two or more funds. For instance, when an investor compares the NAV on January 1 to the NAV on December 31, the difference between the two values can serve as a gauge for the performance of the fund.

References for Net Asset Value

Academic Research on Net Asset Value

A neural network approach to mutual fund net asset value forecasting, Chiang, W. C., Urban, T. L., & Baldridge, G. W. (1996). Omega, 24(2), 205-215.

Investor sentiment and noise traders: Discount to net asset value in listed property companies in the UK, Barkham, R., & Ward, C. (1999). Journal of Real Estate Research, 18(2), 291-312.

Net asset value–based concession duration model for BOT contracts, Wu, M., Wing Chau, K., Shen, Q., & Yin Shen, L. (2011). Journal of Construction Engineering and Management, 138(2), 304-308.

Money market funds run risk: Will floating net asset value fix the problem, Gordon, J. N., & Gandia, C. M. (2014). Colum. Bus. L. Rev., 313.

Property company stock price and net asset value: A mean reversion perspective, Liow, K. H. (2003). The Journal of Real Estate Finance and Economics, 27(2), 235-255.

What Net Asset Value?–An Extension of a Familiar Debate, Penman, S. H. (1970). The Accounting Review, 45(2), 333-346.

Testing Benjamin Graham’s net current asset value strategy in London, Xiao, Y., & Arnold, G. (2008).

Net asset value discounts in listed private equity funds, Lahr, H., & Kaserer, C. (2010).

Net asset value discounts for Asian-Pacific real estate companies: long-run relationships and short-term dynamics, Liow, K. H., & Li, Y. (2006). The Journal of Real Estate Finance and Economics, 33(4), 363.

The net asset value and stock prices of European real estate companies, Rehkugler, H., Schindler, F., & Zajonz, R. (2012). In Real Estate Finance (pp. 53-77). Gabler Verlag, Wiesbaden.

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