Net asset value (NAV)

NAV or Net Asset Value is a market price and performance indicator for potential and present investors. The following FAQs should help in explaining NAV in more detail.


What is a Net asset value (NAV)?

Net asset value is the present, per unit (share) market value of the assets held in an investment fund. It allows potential investors to know the actual value of what they are investing in, while keeping present investors aware of how their investments are performing in the market.

There will at times be a small difference between the actual market value of a fund and its net asset value. That is the reason why NAV is also representative of what the exact market value of the fund should be.

What is the difference between NAV and share price for investment trusts?

NAV is a number that represents the market value of an investment trust’s each share. Share price only represents the perceived value of each share from the investors’ perspective. Comparing an investment trust’s NAV and share price helps in ascertaining the difference between the fund’s actual value and expected value.

How is NAV calculated and what does it indicate about the value of an investment fund?

Net asset value is calculated in a step-by-step process which can be illustrated as follows:

  1. Ascertaining the investment fund’s full asset value.
  2. Ascertaining the total value of the fund’s entre list of liabilities.
  3. Subtracting the total liabilities from the full asset value to get the investment fund’s total asset value.
  4. Dividing the total asset value by the number of outstanding shares to calculate the net asset value or NAV.

Therefore, the formula for calculating net asset value per share is:

NAV=[Total Value of Assets-Total Value of Liabilities]Total Number of Outstanding Shares

When NAV values between two dates are compared, an increase may indicate that the fund has performed better than before, within that timeline. Similarly, a decrease may indicate that the investment fund did not perform as well as before within the two dates.

How does the calculation of net asset value (NAV) affect the buying and selling of shares in an investment trust?

Net Asset Value (NAV) must be calculated to enable buying and selling of shares within an investment fund. There are times when the actual market value of an investment fund will be slightly lower (discount) or higher (premium) than its net asset value. Every time that happens, it could present an opportunity to profit from the difference by either buying (lower than NAV) or selling (higher than NAV).

What factors can cause an investment trust to trade at a premium or discount to its net asset value (NAV)?

From a broad perspective, the two following factors are responsible for a trust trading at a premium or a discount in comparison to its NAV:

  • A significant rise in investor count and total invested amount in a high-demand investment trust will result in it trading at a premium.
  • A significant rise in the number of shares being sold will result in the investment trust trading at a discount.

How does the net asset value (NAV) of an investment fund affect the return on investment and overall performance of the fund?

There are several different types of investment funds, therefore, it is impossible to define exactly how NAV may affect the ROI and overall performance of an investment fund, without knowing what kind of fund is being discussed. For example, NAV comparisons are not the best indicators of mutual fund performance and return on investments, since NAV does not factor in investor earnings and returns.

Mutual funds pay dividends periodically to their investors, which immediately lowers their net asset value as a direct result of that. A low NAV in this case may simply indicate that the mutual fund is paying its dividends in time. Therefore, the NAV value may have little to no impact on the potential return on investment or long-term performance of an investment fund.

What is the significance of the net asset value (NAV) in determining the value of an investment fund and its potential return for investors?

NAV indicates the present market value and overall performance of an investment fund to its investors. Therefore, the significance of NAV in determining the immediate value of an investment fund is quite direct.

It allows investors to determine whether the fund is trading at a premium or a discount at any given time. That knowledge, in turn, allows investors to make informed decisions about when to buy, when to hold, and when to sell.

In case of Exchange-Traded Funds (ETF), NAV calculation and establishment is essential to maintain consistency between the public price of shares and the share’s actual value (NAV).