NAV: how to understand the value of your investments in funds

Net asset value is the basis for fund valuation

When you invest in a mutual fund or ETF, you need to know the real value of your money. This is where NAV – net asset value – comes in. It is a metric that shows how much one share of the fund is worth, taking into account all the fund's assets and all its liabilities. Simply put, net assets are calculated as the difference between what the fund has and what it owes, divided by the number of shares.

How the value of fund shares is actually calculated

The calculation formula is very logical and transparent:

NAV = (Total assets - Total liabilities) / Number of shares outstanding

Where:

• Fund assets are all securities, bonds, cash, and other investments owned by the fund.
• Obligations – debts and expenses that the fund must pay
• Outstanding Shares – the total number of shares of the fund that currently exist.

This calculation gives you the exact price of one share. For example, if the fund has assets worth 500 million dollars, expenses of 50 million, and 20 million shares outstanding, then each share costs 22.50 dollars.

Why it is important for investors to understand NAV

Daily Price Update: The NAV of mutual funds and ETFs is recalculated daily. This allows you to see how the value of your investments changes in real time. When you buy or sell – you receive a fair price, not lower than the actual value of the assets.

Performance Monitoring: By comparing the NAV of different funds over the same period, you can assess which strategy is performing better. An increasing NAV indicates that the fund is generating profits.

Actual transparency: Unlike some other financial instruments, NAV gives you a completely clear understanding of what your investment is actually worth. This is not conjecture or forecasts – it is precise mathematics.

How NAV Works Differently in Different Types of Funds

In mutual investment funds: NAV is the sole price at which investors trade shares with the fund. The transaction occurs once a day after the market closes. You cannot buy for less or more – this is the established value.

In ETFs: the situation is more complicated. Although ETFs also have a NAV, they are traded on stock exchanges throughout the day like regular stocks. This means that the market price of an ETF can be higher or lower than the actual NAV, depending on supply and demand.

In closed-end funds: it's even more interesting here. Closed-end funds issue a fixed number of shares once during an IPO, and then these shares are traded on the market. The price is determined by demand, not NAV. A closed-end fund share can trade at a premium ( above NAV) or at a discount ( below NAV). For example, if the NAV is $20, but demand is high, the share may cost $22 (a 10% premium). Conversely, low demand can lead to trading at $18 (a 10% discount).

What Influences Changes in NAV

Market fluctuations are the main reason for changes in NAV. If the assets of the fund ( stocks, bonds ) increase in price, then the NAV increases. If the market declines, the NAV falls along with it.

Income from dividends and interest also increases NAV. If the stocks in the portfolio pay dividends, this money is added to the fund.

Expenses, on the contrary, reduce NAV. Management fees, operating costs, and other charges are deducted from the assets, decreasing their total value.

Conclusion: why it is necessary to understand NAV

Net assets are a metric that makes the investment world more transparent and fair. It doesn't matter whether you are a novice or an experienced investor – understanding NAV gives you confidence in your decisions. You know exactly what price you are buying at, how your fund works, and what your money is really worth. This is the foundation for smart investing in the world of mutual funds and ETFs.