Apr 21st, 2008
Working Backwards: What’s Net Asset Value?
Net asset value refers to the current price per share of a mutual fund or exchange traded fund. The net asset value is calculated by taking the total value of all the securities in the fund’s portfolio, subtracting any liabilities, and dividing that result by the number of shares outstanding.
Mutual funds compute their net asset value once daily. It does this using the closing prices of the securities in the fund’s portfolio. Every order, either buying or selling, involving the mutual fund is processed at the net asset value determined on the date of the trade, but the actual trade price is not determined until after the close of the trading day.
ETFs trade like stocks, meaning that while their value will be quite close to the actual NAV of the ETF, it’s possible that it will be trading at a premium or discount depending on market demand.
The concept of net asset value may be helpful in viewing a bond fund’s value versus owning an actual bond. If you buy a bond at face value and hold it to maturity, you get the money you paid for the bond back plus interest payments along the way. If you buy a share of a bond fund, while you hold the bond, you also get interest payments, but instead of dealing with the original face value of a bond and getting that money back at maturity, you buy the share at a certain net asset value and when you sell it, you get it at what may be a very different net asset value. Along the way, depending on how the fund performs, the net asset value is likely to fluctuate. If you have difficulty tolerating fluctuation in the net asset value of a bond fund (which tends to be considerably less volatile than in a stock fund), perhaps you would feel more comfortable with an actual bond or, for those who have virtually no tolerance for fluctuation, a FDIC insured certificate of deposit where you are assured of getting the amount of money put into it back–not a penny more, not a penny less.
Understanding the concept of net asset value can help you to understand changes in prices of various funds and how much volatility you are comfortable with.
