You may have heard the term Net Asset Value (NAV) used when referring to mutual funds. Now's your chance to learn how to calculate a mutual fund's NAV and understand what it really means.
Treat a mutual fund's net asset value as its price per share. If you see a fund NAV as $14, then you can expect to buy the fund for $14 or sell it for $14 (although some loaded funds don't follow this logic) . Since mutual funds hold a number of securities, the net asset value must be calculated at the end of day on a daily basis (as opposed to stocks that change prices by the second).
Calculating NAVs
Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of $50 million and there are one million shares of the fund, then the price per share (or NAV) is $50.00.
How to Use Net Asset Values
NAVs are helpful in keeping an eye on your mutual fund's price movement, but NAVs are not the best way to keep track of performance. The reason for this is mutual fund distributions. Mutual funds are forced by law to distribute at least 90% of its' realized capital gains and dividend income each year. When a fund pays out this distribution, the NAV drops by the amount paid. This is important because an investor may become frightened when they see their fund's NAV drop by $3 even though they haven't lost any money (the $3 was paid out to the shareholder). For a better understanding of mutual fund distributions, click here.
The most important thing to keep in mind is that NAVs change daily and are not a good indicator on how your portfolio is doing because things like distributions mess with the NAV (it also makes mutual funds hard to track, see
A Call for Decent Fund Charting
