Understanding the Importance of Net Asset Value (NAV)

Net Asset Value (NAV) is a crucial metric in mutual fund investing. It helps investors determine the value of their investments, evaluate the performance of mutual funds, and make informed investment decisions.

What is NAV?

NAV represents the market value per share for a particular mutual fund. The net value of an asset is most commonly used in the case of open-end funds. With these investments, the interest and shares do not get traded between shareholders. NAV helps determine which investments one might choose to withdraw or keep in their investment portfolio by providing a reference value.

How is NAV Calculated?

NAV= (Total Assets – Total Liabilities) / No. of Outstanding Shares

Total Asset = market value of all securities held by the mutual fund
Total liabilities = the amount owned by the mutual fund to creditors

The number of outstanding shares = the total number of shares issued by the mutual fund.

The Factors that Determine the NAV of a Mutual Fund are:

1. Profits earned or losses booked from the underlying investments
2. Fund expenses
3. The type of Mutual Fund
4. Dividend pay-outs
5. Investor entry or exit

NAV in Closed-End Funds vs. Open-End Funds

An open-end fund can issue an unlimited number of shares, does not trade on exchanges, and is priced each day at the close of trading at its NAV price. Closed-end funds are listed on a stock exchange, trade similarly to securities, and can trade at a price that’s not equal to their NAV. ETFs trade like stocks, and their market value can differ from their actual NAV.

Uses of NAV

Some of the uses of NAV in investment management include:

1. Measuring the fund’s performance: NAV is a reliable metric for measuring the performance of mutual funds. By comparing the NAV of a fund over time, investors can determine whether the fund is generating positive or negative returns. So calculating the NAV of mutual funds is a primary step in measuring the fund’s performance.

2. Buying and selling shares: NAV is the price at which investors buy and sell shares of mutual funds. Investors can use NAV to determine the value of their investment and make informed investment decisions.

3. Fund management: Mutual fund companies use NAV to manage the fund’s portfolio. The NAV is used to derive the value of the fund’s assets and liabilities and compute the fund’s expense ratio.

How is NAV Relevant to Investors?

Investors who try to time markets typically want to make lump sum investments when the NAV of a fund is low and redeem when the NAV of the fund increases. This difference between selling NAV and purchasing NAV is expected to maximize the profits from the investment. While this is possible in theory, it is extremely difficult to implement in practice as market movements and changes in mutual fund NAV can be very hard to predict. So, instead of concentrating just on a mutual fund’s NAV and trying to time markets, investors should instead focus on being systematic with their investments and staying invested for the long term.


By understanding the concept of NAV and its best uses, investors can make informed investment decisions that align with their financial goals. It is a common misconception that purchasing Mutual Funds with lower NAVs is a safe bet. For this very reason, people prefer to subscribe to New Fund Offers (NFOs) over investing in existing Mutual Funds. The formula to calculate NAV is simple and estimated daily at the end of the trading day. These assumptions might not always be accurate. Thus, it is ideal to check the quality of the Mutual Fund’s underlying investments, past performance, and NAV of the fund before investing in it. Also, it is imperative to understand the Mutual Fund’s goal and investment strategy.