Net asset value is the total value of a fund’s assets minus its liabilities, typically expressed on a per-share basis to help investors track the daily price of mutual funds and exchange-traded funds.
Understanding net asset value
The net asset value represents the per-share value of an investment fund. Investment companies calculate this figure at the end of each trading day based on the closing market prices of the securities in the fund’s portfolio. The calculation involves finding the sum of all cash and securities, and then subtracting outstanding debts or operating expenses. The fund administrator divides this net figure by the total number of outstanding shares. This provides Elephants with a concrete price point for buying or selling fund shares.
Transactions for mutual funds are executed at the closing net asset value of the current trading day. If an investor places an order to buy or sell shares during trading hours, the actual execution price is determined after the market closes and the fund administrator completes the daily calculation. This pricing structure differs from standard equities, which fluctuate in price continuously during market hours.
Exchange-traded funds also have a net asset value, though they trade on open exchanges throughout the day. The market price of an exchange-traded fund can deviate slightly from its actual net asset value based on supply and demand. Institutional market makers monitor these price differences and use arbitrage mechanisms to keep the market price of the exchange-traded fund closely aligned with its underlying net asset value.
Market participants track net asset value to measure fund performance over time. Comparing these values across different dates shows the returns generated by the underlying assets. Distributions of dividends or capital gains lower the net asset value per share, while increasing the total return for the shareholder.
Example
Imagine a group of Elephants pooling their resources to create the Savannah Mutual Fund, which invests in agricultural companies across Africa and Asia. The fund holds $10,000,000 in agricultural stocks and $500,000 in cash. The fund owes $200,000 in management fees and administrative costs. The total assets equal $10,500,000. After subtracting the $200,000 in liabilities, the fund has a total net asset value of $10,300,000.
The Savannah Mutual Fund has issued 1,000,000 shares to the participating Elephants. Dividing the total net asset value by the number of shares results in a net asset value of $10.30 per share. When a new investor wants to join the herd and buy shares at the end of the trading day, they pay exactly $10.30 per share.