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Find more details about NAV here.
The calculation looks like this:
NAV = (Market value of mutual fund securities – liabilities) / Number of shares outstanding
NAV’s daily changes reflect the underlying changes in the mutual fund – that is, the net asset change and the number of shares outstanding.
Learn here about the difference between NAV and Total Return.
Failing to adjust the net asset value of a mutual fund tends to understate the returns of the underlying fund. That’s because a mutual fund’s NAV is reduced by the amount of the dividend payout. Over time, this will skew the performance of the mutual fund – but only on paper.
For example, assume that a dividend-paying mutual fund’s NAV is $90 at the beginning of the fiscal year and $110 by the end of the same year. Now, also assume it has a $9 dividend. If the NAV isn’t adjusted, the mutual fund’s total return will look like this:
($110 – $90) / 100 = 20%
If we include the $9 dividend to adjust the NAV, then the mutual fund’s actual performance will be this:
($110 + $9) – $90 / 100 = 29%
However, a much more useful approach for investors is to look at the fund’s total return rather than just changes in NAV or adjusted NAV. Besides, NAV is much less important within the broader context of long-term investing. Most mutual funds are constructed for long-term growth and investors who hold them for long periods of time benefit more than those who sell them more frequently. A well-designed and executed mutual fund will continue to make money regardless of what NAV says – that is, if new shares of an underlying security are continually purchased, the fund holding that security will also increase in value.
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