Understanding the Net Asset Value of Your Favorite Funds

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As a new investor, you may see the phrase net asset value (NAV), next to your favorite mutual fund when you go to buy or sell shares. Mutual funds use the NAV to represent the unit—per share—price of owning a share of the fund.

Net asset value, along with any dividends you receive from your investment, will impact your portfolio's total return in the long-run. Exchange-traded funds (ETFs) also use NAV to price share price.

Learn what net asset value means and why you need to know it before you make investing decisions.

How Mutual Funds Are Structured

Mutual funds and exchange-traded funds (ETFs) are types of pooled funds. This means the fund manager will collect all individual investments and then invest that money into other assets.

The assets that a mutual fund invests in will align with the stated goal of that particular fund. These goals could be to follow an index like the S&P 500, to represent a segment or industry of the total market, or to target a particular retirement year.

All these different assets impact the price of shares in a mutual fund. The stocks, bonds, and other securities held as investments by a mutual fund will trade throughout the day, and their price will move in accordance with trading activity.

Net asset value (NAV) is the net worth or book value—calculated as asset less any liabilities—of the mutual fund based upon the closing pieces of the underlying investment the fund owners.

Using NAV to Set Share Price

Mutual funds must calculate their NAV once per day, and typically this happens after the U.S. markets close. The buying and selling activity of a mutual fund happens once a day to protect investors from rapid market moves.

At 4:30 p.m., Eastern Standard Time, the value of a mutual fund's underlying positions is added up by accounting firms based upon the closing price of the stock market and other exchanges. This value is used to determine the value of all the mutual fund's holdings.

Any debts or liabilities of the mutual fund, such as stock that is sold short, is deducted to calculate the net asset value. The stock exchanges then update the share price of the mutual fund to reflect this new NAV. Because the value of the fund's assets and liabilities, as well as the number of shares available, change daily, the NAV also changes daily.

This net asset value is the price at which investors can buy or sell their shares at the end of each trading day. 

Mutual fund NAV does not reflect embedded capital gains, which means that under the wrong circumstances, you could have to pay someone else's tax bill even if you experience a loss on your shares.

Executing Orders for Mutual Funds

Any orders that you place to buy or sell mutual fund shares are aggregated and then settled at 4:30 p.m., EST. 

For example, if you sell 1,000 shares of an index fund at 11:32 a.m., you won't know the price you are going to receive for those shares, or get your money until 4:30 p.m. that afternoon when the NAV is calculated.

This is the reason you never see the prices of traditional mutual funds throughout the trading day. The NAV is only determined at the end of the trading day.

The Difference Between NAV for Mutual Funds and ETFs

In contrast to traditional mutual funds, exchange-traded funds trade throughout the day. As a result, the share price of an ETF might be at a premium, at parity, or a discount to the NAV. 

However, you won't know that when you execute a trade. This means you might pay more or less than the value of the underlying securities of the fund itself. 

Historically, closed-end funds have traded at discounts—in some cases, substantial discounts—to the net asset value.

What Net Asset Value Can't Tell You

While NAV is an important measure of the value of a mutual fund, it doesn't not tell you everything you need to know about a fund's performance, value, or potential place in your portfolio.

Net asset value does not account for the sometimes significant unrealized capital gains exposure that has sometimes built up within an older mutual fund or index fund. It also can't tell you if the actual intrinsic value of the underlying holdings is reasonable or not.

For example, during the dot-com boom, you could have bought a fund at its net asset value and still been paying high price-to-earnings ratios for businesses destined for bankruptcy.

While NAV is an important element of mutual fund trading for investors to understand, it is not a replacement for other information about the mutual fund. Before you invest, look into a mutual fund's reputation, performance, goals, and long-term value to help you whether it is a good fit for your investment portfolio.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. Investor.gov. "Net Asset Value." October 28, 2020.

  2. U.S. Secutiries and Exchange Commission. "Fast Answers: Net Asset Value." October 28, 2020.