Net asset value: definition and calculation

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net asset value

When making an investment decision, it helps to use all the resources at your disposal. Investors often include net asset value when considering an investment. The net asset value (NAV) is one way of calculating the value of a mutual fund or an exchange-traded fund (ETF). This is how it works.

Net asset value explained

Net asset value (NAV) is the value of an entity’s assets less its liabilities divided by the shares outstanding. This represents the total value of an entity. Usually this calculation is used to determine the value of mutual fund and exchange traded funds (AND F). Investors use the net asset value to represent the price per share or unit of an entity on a certain date or time.

You can assume that any business or business with assets and liabilities can calculate its net asset value. However, companies generally use net assets or net value calculation. This is the difference between its assets and its liabilities. Recently, the term NAV has become popular when it comes to fund valuation and pricing. Since investors divide the difference between assets and liabilities, fund basically refers to the value per share of a given fund. By calculating the net asset value, investors can value the shares of the funds.

Net asset value for mutual funds

Mutual funds don’t trade in real time like stock prices tend to. Stock prices fluctuate every second. However, mutual fund prices are based on the assets and liabilities of the day before. When calculating the assets of the mutual fund, you should include the fund’s investment, accounts receivable, cash and cash equivalents, and accrued income. Since the fund can have cash, you will record the cash in cash equivalents. Accumulated income is earned income that has not yet been received. But the fund’s claims will include interest payments and dividends that occurred on that day.

Conversely, liabilities include amounts owed to banks or lenders, pending expenses and other charges or fees. Depending on the date of payment, the expenses will be either current liabilities or long term liabilities. Accrued expenses will include staff salaries, operational costs, management fees, etc.

How to calculate the new asset value for a mutual fund

net asset value

net asset value

Calculating net asset value is fairly straightforward.

NAV = (Assets – Liabilities) / Total number of shares outstanding

The value of assets is generally the value of all securities in the portfolio. While the value of liabilities is a combination of all liabilities such as management fees, audit expenses, operational costs, staff salaries, etc. For example, suppose we want to calculate the net asset value of a mutual fund and have the following data:

  • Value of securities in the portfolio at closing the day before ($ 70 million)

  • Cumulative income for the day ($ 16 million)

  • Total accounts receivable ($ 2 million)

  • Cash and cash equivalents ($ 20 million)

  • Long-term liabilities ($ 13 million)

  • Current liabilities ($ 1 million)

  • Cumulative costs for the day ($ 10 million)

  • Outstanding shares ($ 15 million)

($ 70,000,000 + $ 16,000,000 + $ 2,000,000 + $ 20,000,000) – ($ 13,000,000 + $ 1,000,000 + $ 10,000,000) / $ 15,000,000

NAV = 5.60

Mutual fund stock will trade at $ 5.60 for that day.

Net asset value for ETFs

ETFs or other closed-end funds trade like stocks on an open market. They may trade slightly above or below the NAV. Because they trade slightly above or below actual NAV, active traders can capitalize on profitable trading opportunities if they can identify them.

If you are looking for a more precise metric, ETFs also calculate their NAV daily and broadcast intraday NAV several times per minute.

Intraday NAV for ETFs

If we want to calculate the NAV of an ETF, let’s say the ETF is $ 100 and you buy $ 25 of stocks, which costs you $ 2,500 ($ 100 x 25). Then, two months later, the NAV is $ 120, which makes your investment $ 3,000 ($ 120 x 25).

This would result in a profit of $ 500. The return on your holding period would then be 20% (($ 3,000 – $ 2,500) / ($ 2,500)).

How to use net asset value to invest

Often, investors assess a good investment opportunity by comparing two calculations of NAV on two different days. For example, an investor can compare the net asset value on January 31st to the net asset value on February 1st. It can do this to measure the performance of the fund. However, looking at the NAV for both dates may not be the best metric for measuring a fund’s performance.

Mutual funds are required for accumulated payment realized capital gains as well as all their income. Income can include interest earned or dividends paid. Therefore, since companies regularly pay income to shareholders, the net asset value may decline in proportion to these payments. This means that these values ​​are not represented in the NAV values ​​when you compare two dates.

Instead of using net asset value to determine a good investment opportunity in a mutual fund, it is wise to measure the total return of the fund. This is the real return rate of any given investment. Many investors also use the compound annual growth rate (CAGR), which is the average annual growth rate of an investment over a period of time. However, this period must be longer than one year, but it takes into account all payments and earnings of intermediate income.

The bottom line

net asset value

net asset value

To calculate the net asset value of an entity, you subtract liabilities from assets, then divide by the number of shares outstanding. While NAV can help investors identify investment opportunities, they may want to use this method of calculation along with other metrics to make sure the investment makes sense. So if some security interests you, be sure to conduct a full assessment of this security before making your final investment decision.

Investment advice

  • Consider speaking with a financial advisor about the net asset value of any security you plan to trade. Finding the right financial advisor for your needs doesn’t have to be difficult. The free tool of SmartAsset connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you reach your financial goals, start now.

  • If you don’t have much money to invest in the market, you might be better off working with a robo-advisor. These investment services will determine your ideal asset allocation and then you build an investment plan.

Photo credit: © iStock.com / anyaberkut, © iStock.com / Chalirmpoj Pimpisarn, © iStock.com / MicroStockHub

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