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What Is Net Asset Value (NAV)?

The net asset value (NAV) is a measurement used to determine an entity’s total value. How to determine this value is by taking the entity’s assets and subtracting it by its liabilities. NAV is the per share price of an investment fund based on a given period of time.

Additionally, the NAV of a mutual fund is the price where the shares are registered with the US Securities and Exchange Commission to be traded or redeemed for a net profit. The holdings in one’s own portfolio could also be measured by the net asset value.

More importantly, net asset value is commonly used by investors to define future potential investment opportunities. Investors will utilize an investment account to trade and redeem shares by measuring their value based on NAV.

Financial firms and funds are even able to trade shares on the stock market that have varying NAVs. At the end of the trading day, the NAV will be calculated based on the closing stock values of the portfolio’s securities. 

Why Is Net Asset Value Important?

Any corporate or business organization that deals with assets and liabilities has a NAV. For financial firms, it is considered to represent the organization’s current book value. This which is the value of an asset based on the company’s balance sheet account balance.

NAV depicts a fund’s “per-share” value, which enables the shareholder to better manage the value for the fund’s shares. It can be utilized to find undervalued and overvalued investments. Lastly, organizations that are projected to perform well on the stock market usually will have a higher NAV. 

How to Calculate Net Asset Value

The NAV calculates the value of a single share from a fund. In order to calculate the NAV you would need to find the cumulative value of all cash and assets in a fund’s portfolio. After doing this you then subtract liabilities, by the amount of outstanding shares from the mutual fund.

This important value is the price at which investors will buy and sell fund shares between companies. At the end of each trading day, a NAV calculation is performed, using the closing market prices for the portfolio’s securities.

Formula of Net Asset Value

The formula for calculating the NAV of a mutual fund is:

NAV = (Assets – Liabilities) / Total number of outstanding shares

In short, these are the correct qualifying items that would be included from a mutual fund. 

How Does Net Asset Value Increase?

When the value of the fund’s shares increases, the fund’s NAV will also increase. On the contrary, when the value of the shares in a portfolio decreases, so does the fund’s NAV.

Example of Net Asset Value

If a mutual fund had $35 million that was invested in securities and $10 million in cash which equaled total assets of $45 million. Additionally, this investment has liabilities of $8 million.

As a result, subtracting the total liabilities from the total assets would equal to total value of $37 million.

What Is a Good Net Asset Value?

It has been proved that lower or higher NAV will have little impact on the actual value of a fund. More importantly, it is not recommended for people to invest solely on if a financial instrument having higher or lower NAV.

High Net Asset Value

Funds that have a high NAV often will not be one of the top performing assets. Hence, you want to invest in mutual funds based on the quality of the fund’s management and portfolio.

Low Net Asset Value

Companies with a low asset value can sometimes be a better investment opportunity. However, NAV can often times have no effect on the investors returns. Therefore, it can be misleading if you base your investment decisions strictly on net asset value.

Net Asset Value, Market Value, And Book Value

Any corporate or business organization that deals with assets and liabilities will have a NAV.

Market value is the price at which anything can be sold on the stock market since it is value that investors deem the business. It is similar to market capitalization which is the total market value of a company’s outstanding shares of stock. However, the market value of a business is a great indicator of how people feel about its future prospects. In short, it is typically determined based on valuations, such as price-to-sales and price-to-earnings.

Whether as, book value is the value of an asset based on the company’s balance sheet account balance.

Financial Advisors Can Help You Calculate NAV

Net asset value often used by investors and financial institutions to define future potential investment opportunities. In addition, it can be utilized to find out if your investments are undervalued or overvalued.

Financial advisors can help you understand the importance of NAV and how to utilize it correctly to make better investment decisions. In conclusion, you should consult a financial advisor to help you invest and succeed on the stock market.