How to Calculate Net Asset Value
The net asset value, NAV, happens to represent the net value of a particular entity. It calculated as the total value of the entity’s assets subtracted from the total value of its liabilities. NAV is most commonly used when it comes to a mutual fund or an exchange-traded fund (ETF), wherein it represents the per share/unit price of the specific fund on a particular date or time. NAV happens to be the price at which the shares or units of all types of funds registered with the U.S. Securities and Exchange Commission or SEC.
Theory for Net Asset Value
In theory, NAV can be had by any and every suitable business entity or product, that is of financial nature and deals with the concepts of assets and liabilities in accounting. When it comes to organizations and business entities, the difference is between the assets and the liabilities, identified as the net assets or the net worth or the capital of the company.
The term NAV has gained massive popularity in relation to the valuation and pricing of a fund, which arrived at by the division of the difference between assets and liabilities, by the number of shares or units held by the investors. Therefore, the fund’s NAV always tends to represent a per-share value of the fund. Which in turn, makes it very easy to utilize for valuing and transacting in the fund shares.
Formula:
What Is The Formula For A Fund’s Net Asset Value?
NAV or Net Asset Value = (Assets – Liabilities) / (Total Number Of Shares Outstanding)
Note that only the correct qualifying items should be included when it comes to the assets and liabilities of a fund.
Funds Collecting for NAV
A fund happens to work by collecting money from a large pool of investors. After that, it tends to use the collected capital to invest in various stocks and other securities of financial nature, that can very well fulfill the investment objective of the particular fund. Each investor then receives a specified number of shares in proportion to the amount they invested. It should also be remembered that they are always free to sell or completely redeem the value of their fund shares at a later date and then pocket the profit or loss they made from it. Now, since the regular investment and redemption of fund shares tends to start after the fund launched, a mechanism happens to required to price the fund’s shares.
This is where the NAV comes into play as the pricing mechanism. Also, you must remember that, unlike a stock, whose price always change every second, mutual funds are never traded in real-time. Instead, mutual funds happen to be priced based on the end of the day methodology which is based on their assets and liabilities.
This brings us to the end of our discussion on how to calculate net asset value. Now, do let us know if you were aware of this beforehand or if you gained some extra knowledge from this particular article.
