'Net Asset Value' is explained in detail and with examples in the Accounting edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
The Net Asset Value refers to a mutual fund and its per share value. It is also known by its acronym NAV. Exchange traded funds, or ETFs, can also be referenced by the NAV. These values which the companies themselves compute for investors only provide a snap shot of the NAV at a particular time and date. In either security type, the fund’s per share dollar value arises from the aggregate value of every security within its portfolio minus any liabilities the fund may owe. Finally this is expressed over the total number of outstanding shares in order to arrive at the shares’ ultimate NAV.
Where mutual funds are concerned, the Net Asset Value is derived one time every trading day. They utilize the closing market prices for every security within the fund’s holdings in order to determine this. Once this is done, the fund is able to settle all sell and buy orders which are outstanding on the shares. These prices will be set by the NAV of the mutual fund in question for the value per the trade date. Investors will always be required to wait to the next day in order to obtain their actual trade-in or trade-out price.
Because mutual funds do pay out nearly all their capital gains and income, such NAV changes are never the optimal gauge for the performance of the given fund. Instead these are better determined by looking at the yearly aggregate return, or total return.
With ETFs, these are actually closed end types of funds. This means that they actually trade more like stocks do. The shares of these Exchange Traded Funds therefore constantly trade at the market value. It might be a literal value which is higher than the NAV. This would be trading at a premium to the Net Asset Value. It could similarly trade under the NAV. This would mean the prices were trading at a discount to the NAV.
With these ETFs, the Net Asset Value becomes computed once at the markets’ close so that the fund can correctly report the ETF values. During the day however, these are figured differently than the mutual fund computations. This is because the ETFs will compile the during-the-day NAV in real time at numerous points in every minute of the trading day.
It is helpful to consider an example of how the mutual funds compute their Net Asset Value calculations. The formula is actually very straightforward. It is simply that the NAV is equal to the mutual fund’s assets less its liabilities with the difference divided by the total number of shares outstanding. The assets in the case of mutual funds include cash equivalents and cash, accrued income, and receivables. The main portion of their assets commonly are their investments, which will be priced per the end of the day closing values. Liabilities equate to the complete longer-term and shorter-term money owed, along with each accrued expense. Among these expenses will be utilities, salaries of the staff of the fund, and various operational costs for running such a fund.
Consider that the fictitious Diamond Stocks Mutual Fund counted $200 million in investments, figured utilizing the end of day closing prices of all their assets. Besides this, it has $14 million in cash equivalents and cash and another $8 million in receivables in total. The daily accrued income amounts to $150,000. Besides this, Diamond Stocks owes $26 million in its shorter-term liabilities and has $4 million of longer-term liabilities. The daily accrued expenses amount to $20,000. With 10 million outstanding shares, the net asset value would equate to $19.21 in the case of the Diamond Stocks Mutual Fund.