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

How Mutual Funds Are Structured

Mutual funds and ETFs are types of pooled funds. Here, 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, a segment or industry of the total market, or target a particular retirement year

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. Mutual funds price at the end of the trading day at the NAV registered with the Securities and Exchange Commission (SEC).

Using NAV to Set Share Price

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, or NAV, is often called. The stock exchanges then update the share price of the mutual fund to reflect this new NAV.

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. It 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. It is the reason you never see the prices of traditional mutual funds throughout the trading day.

The Difference With ETF Net Asset Value

In contrast to traditional mutual funds, exchange-traded funds, or ETFs, trade throughout the day and as a result, the share price might be at a premium, at parity, or a discount to the NAV. It 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

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. Net asset value can't tell you if the actual intrinsic value of the underlying holdings is reasonable or not; e.g., during the dot-com boom, you could have bought a fund at its net asset value and still been paying obscene price-to-earnings ratios for businesses destined for bankruptcy.

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.