Legal Definitions - net asset value

Net Asset Value (NAV) is a fundamental measure representing the per-share value of an investment fund, such as a mutual fund or an Exchange-Traded Fund (ETF).

It is calculated by taking the fund's total assets (like the market value of all its investments) and subtracting its total liabilities (such as operational expenses or debts). This resulting figure is then divided by the total number of outstanding shares held by investors.

Essentially, NAV tells investors the underlying value of each share based on what the fund owns and owes at a specific point in time, typically at the end of each trading day.

Here are some examples to illustrate how Net Asset Value applies:

• Example 1: A Growth Stock Mutual Fund

  Imagine a mutual fund that invests primarily in technology and growth stocks. At the close of trading, the fund's portfolio of stocks is valued at $500 million. However, the fund also has outstanding liabilities, such as management fees, administrative costs, and pending trades, totaling $10 million. If the fund has 20 million shares outstanding held by various investors, its Net Asset Value (NAV) would be calculated as follows:

  ($500 million in assets - $10 million in liabilities) / 20 million shares = $24.50 per share.

  This $24.50 is the NAV, representing the intrinsic value of each share in the fund based on its holdings and obligations for that day. When you buy or sell shares of this mutual fund, you typically do so at its NAV.

• Example 2: A Bond Exchange-Traded Fund (ETF)

  Consider an ETF that holds a diversified portfolio of corporate bonds. While ETFs trade on stock exchanges throughout the day, their official NAV is still calculated daily. Suppose this bond ETF owns bonds with a total market value of $1 billion. It also has operational expenses, such as custodian fees and legal costs, amounting to $5 million. If there are 50 million shares of this ETF outstanding, its NAV would be:

  ($1 billion in assets - $5 million in liabilities) / 50 million shares = $19.90 per share.

  Even though the ETF's market price might fluctuate during the day, this $19.90 NAV provides a benchmark for its true underlying value, reflecting the value of its bond holdings minus its expenses.

• Example 3: A Real Estate Investment Trust (REIT) Mutual Fund

  Let's look at a mutual fund that specializes in investing in Real Estate Investment Trusts (REITs), which own and operate income-producing real estate. This fund's primary assets are its holdings in various REIT stocks, valued at $300 million. It also has short-term debts and accrued expenses, such as audit fees and marketing costs, totaling $3 million. If the fund has 15 million shares outstanding, its NAV would be:

  ($300 million in assets - $3 million in liabilities) / 15 million shares = $19.80 per share.

  This NAV of $19.80 indicates the value of each share in the fund, directly reflecting the performance and value of the underlying real estate investments (through the REITs) and the fund's operational costs.