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Mutual Fund Education

Understanding Mutual Fund Net Asset Value (NAV)

Mark P. Cussen Sep 04, 2014

Mutual funds provide diversification, professional portfolio management, and liquidity for both small and large investors. Each fund pools the money from its investors and then purchases a portfolio of securities that is held and traded by the fund managers. Each fund is its own separate security that is bought and sold, and trades at its own price. This price has two sides, the Net Asset Value (NAV) and the Public Offering Price (POP). Understanding how the NAV of a fund is determined will help you to see the relationship between the fund share price and the collective prices of the underlying securities held therein.

Open-Ended Funds

Be sure to also read 7 Questions to Ask When Buying a Mutual Fund

How NAV Is Calculated


$350 million assets – $80 million liabilities = $270 million / 55 million shares outstanding

Fund price per share = $4.91 per share

The Net Asset Value is therefore the composite price of all of the net equity in the fund on a per-share basis.

This calculation is made at the end of each trading day after all transactions have settled and all securities held by the fund have stopped trading. The Public Offering Price is always then based upon the Net Asset Value.

Why It Matters

As long as money continues to pour into a fund, the company will issue new shares for purchase, and the price per share is solely dependent upon the prices of the securities in its portfolio. When a stock is in demand, its price will rise as a direct result of buying pressure because there are only a limited number of shares, and any new issue of shares will dilute the price of all shares that are currently outstanding proportionately. However, there can come a point where a fund grows to a size where the managers have too much money to invest, and then the fund may be closed to new investors.

Closed-end funds and ETFs do have NAVs per share, but supply and demand can push the prices they trade at above or below this price. If they are trading above this price, they are trading at a premium; below this price means that they are trading at a discount.

It should be noted that changes in the NAV of a fund from one day to another are fairly insignificant. Most mutual funds are designed to be held for longer periods of time, and it is seldom practical to try and trade open-ended funds to profit from short-term market swings. Furthermore, the NAV will not reflect the value of any interest or dividends that are paid, which can provide a significant amount of the total return posted by a fund. Investors therefore need to look at the total return posted by a fund in order to gauge its value.

Money market mutual funds typically have a constant, stable NAV of $1.00 per share, and they are usually the most liquid kind of fund. There have been instances where this value fell below a dollar per share, but this is very rare.

The Bottom Line

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