What is Adjusted NAV?

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What is Adjusted NAV?

Sam Bourgi

|

nav in capital letters
Investors who rely on mutual funds to grow their wealth often overlook the importance of the adjusted net asset value (NAV) in their decision-making progress. Yet others spend too much time adjusting their NAV in pursuit of higher returns and better portfolio management.
As you’ll see in this article, the best approach lies somewhere in the middle.

Find more details about NAV here.

What is NAV?

In simple terms, the net asset value refers to a mutual fund’s assets minus liabilities. It is what investors need to pay in order to buy or sell one share of the underlying mutual fund. Also known as the book value of a mutual fund, NAV is calculated at the end of each trading day by adding up all market values of the mutual fund’s securities, plus cash and equivalent holdings, minus fees and commission, divided by the number of shares outstanding.

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.

Where Does the Adjusted NAV Come Into Play?

Now that we’ve covered NAV, it’s important to investigate how NAV is impacted after a fund pays out dividends. This is where the importance of the adjusted NAV comes into play. The net asset value is said to be “adjusted” only when there is a dividend in play. However, this does not impact the mutual fund’s underlying performance.

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%

How Important Is NAV?

While adjusting or not adjusting NAV doesn’t have a direct impact on the performance of a mutual fund, it can be used to gauge the fund’s total return. Changes in a mutual fund’s NAV reveal important information about the underlying securities it holds. A mutual fund’s NAV rises or falls when the price of the majority of assets rises or falls. If the NAV rises, investors can feel relatively confident that the underlying fund is increasing in value. On the flipside, if the NAV drops, investors can expect that their funds are decreasing in value.

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.

Be sure to check out our News section to keep track of the recent fund performances.

The Bottom Line

A mutual fund’s adjusted NAV is an important data point for evaluating performance over the long term. However, NAV alone is insufficient in the decision-making process. A more balanced approach that looks at total returns and underlying assets is a more useful endeavor.

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Find out why $30 trillon is invested in mutual funds.

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nav in capital letters

What is Adjusted NAV?

Sam Bourgi

|

Investors who rely on mutual funds to grow their wealth often overlook the importance of the adjusted net asset value (NAV) in their decision-making progress. Yet others spend too much time adjusting their NAV in pursuit of higher returns and better portfolio management.
As you’ll see in this article, the best approach lies somewhere in the middle.

Find more details about NAV here.

What is NAV?

In simple terms, the net asset value refers to a mutual fund’s assets minus liabilities. It is what investors need to pay in order to buy or sell one share of the underlying mutual fund. Also known as the book value of a mutual fund, NAV is calculated at the end of each trading day by adding up all market values of the mutual fund’s securities, plus cash and equivalent holdings, minus fees and commission, divided by the number of shares outstanding.

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.

Where Does the Adjusted NAV Come Into Play?

Now that we’ve covered NAV, it’s important to investigate how NAV is impacted after a fund pays out dividends. This is where the importance of the adjusted NAV comes into play. The net asset value is said to be “adjusted” only when there is a dividend in play. However, this does not impact the mutual fund’s underlying performance.

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%

How Important Is NAV?

While adjusting or not adjusting NAV doesn’t have a direct impact on the performance of a mutual fund, it can be used to gauge the fund’s total return. Changes in a mutual fund’s NAV reveal important information about the underlying securities it holds. A mutual fund’s NAV rises or falls when the price of the majority of assets rises or falls. If the NAV rises, investors can feel relatively confident that the underlying fund is increasing in value. On the flipside, if the NAV drops, investors can expect that their funds are decreasing in value.

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.

Be sure to check out our News section to keep track of the recent fund performances.

The Bottom Line

A mutual fund’s adjusted NAV is an important data point for evaluating performance over the long term. However, NAV alone is insufficient in the decision-making process. A more balanced approach that looks at total returns and underlying assets is a more useful endeavor.

Sign up for our free newsletter to get the latest news on mutual funds.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next