Net asset value

Net asset value

Net asset value (NAV) is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. However, the term may also be used as a synonym for book value or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors and, thereby, represent the net asset value per share.[1]

Net asset values and other accounting and recordkeeping activities are the result of the process of Fund Accounting, sometimes called securities accounting, investment accounting and/or portfolio accounting. Fund Accounting systems are sophisticated computerized systems used to account for investor capital flows in and out of a fund, purchases and sales of investments and related investment income, gains, losses and operating expenses of the fund. The fund's investments and other assets are valued on a regular schedule such as daily, weekly or monthly, depending on the fund and associated regulatory or sponsor requirements. There is no universal method or basis of valuing assets and liabilities for the purposes of calculating net asset value used throughout the world, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation and any regulatory and/or accounting principles that may apply. For example, for US registered open-ended funds, investments are commonly valued each day the New York Stock Exchange is open, using closing prices (meant to represent fair value),[2] typically 4:00 PM Eastern Time. For US registered money market funds, investments are often carried or valued at 'amortized cost' as opposed to market value for expedience and other purposes, provided various requirements are continually met.[3]

At the completion of the valuation process and once all other appropriate accounting entries are posted, the accounting books are 'closed' enabling a variety of information to be calculated and produced including the net asset value per share.


Open-ended funds

Net asset value is most commonly used in the context of open-ended funds. Shares and interests in such funds are not traded between investors, but are issued by the fund to each new investor and redeemed back to the fund when an investor withdraws. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash.

As a numerical example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share", being the price at which the shares will be issued, is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be US$240MM, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to 1/6 of the fund's value when he withdraws his investment, proportionately adjusted for any subsequent profits or losses.

The valuation of the assets and liabilities of an open-ended fund is therefore very important to investors. If the NAV in the above example had, with the same assets, been calculated as US$160MM (and the NAV per share as $160), the investor would have been given 250,000 shares and would become entitled to 1/5 of the fund's value.

In contrast, closed-end funds are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree it to be, which may not correspond to the fund's NAV. Publicly traded shares in such funds generally trade at a price below NAV.

Valuation of assets in open-ended funds

The NAV of a collective investment scheme (such as a US mutual fund or a hedge fund) is calculated by reference to the total value of the fund's portfolio (its assets) less its accrued liabilities (money owed to lending banks, fees owed to investment managers and service providers and other liabilities).[4]

The portfolio's assets are generally valued by objective criteria established at the outset of the fund. Where assets are traded on a securities exchange or cleared through a clearing firm, the most common method of valuation is to use the market value of the assets in the portfolio (using, for example, the closing bid price or last traded price). The value of OTC derivatives may be provided by the counterparty to the derivative, who may be trading similar derivatives with other parties. Where there is no objective method of calculating the value of an asset, the fund manager's own valuation methods subject to a fund's directors or trustees is usually used.


Turning to operating companies as opposed to investment companies (mutual funds), in determining whether shares in a public company are a cheap or expensive investment, one tool used by investors is a comparison of the company's current market capitalization (being the price at which the market values the company) with its NAV. The NAV may be below the market price for the following reasons:

  • The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV. Also, accounting principles and basis of presentation of amounts in financial statements vary around the globe, further blurring the comparability of companies in various jurisdictions.
  • The current value of a company's assets likely differ than the historical cost financial statements used in the NAV calculation (and financial statement values and related principles of accounting vary from
  • Certain assets, such as goodwill (which broadly represents a company's ability to make future profits), are not necessarily included on a balance sheet and so will not appear in an NAV calculation.

A company's market value will not always be greater than its NAV. For example, analysts and management estimated that Liberty Media Corporation was trading for 30-50% below its net asset value (or "core asset value") in June 2007.[citation needed] Where a company's market value is lower than its NAV, it may be considered more profitable to wind the company up and sell off its assets individually rather than continue to run it as a going concern.

In contrast to fund valuation, the assets of a company will generally be valued for the purpose of a NAV calculation using the book value, the historical cost or the amortised cost of the company's assets, or an appropriate combination of the three.

Real estate investment trusts

NAV is one of the valuation indices of real estate investment trusts (REITs - pronounced "Reets"). NAV is normally quoted "per investment unit" where the value is divided by the number of total outstanding investment units. In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. The degree of premium/discount on individual investment unit prices relative to the per-unit NAV serves as the yardstick for assessment. The NAV index is synonymous to the adjusted price-to-book ratio applied in the world of stocks in which factors such as unrealized losses/gains of owned properties and brand values are reflected. News companies such as PropertyMall typically report on a REITs NAV when the company reports it.[5]

Variable insurance and variable annuity contracts

Variable universal life insurance policies and variable annuity contracts often are structured somewhat similar to mutual funds, and they may vary in value as securities and markets fluctuate. Typically, these insurance or annuity products issue 'units' of ownership to policyholders/annuitants in exchange for their investment—similar to shares of a mutual fund. Also similar to a fund, the assets, liabilities and net assets of these product entities are valued periodically resulting in an asset unit value or AUV or UAV per share - analogous to NAV for a fund.

See also


  1. ^ [1] Raymond James, Glossary of Investment Terms, August 9th, 2011
  2. ^ AICPA Audit and Accounting Guide - Investment Companies May 1, 2007.
  3. ^ A Guide To Understanding Mutual Funds, Investment Company Institute;
  4. ^ CFA Institute. (2008). Derivatives and Alternative Investments. pg 177. Boston: Pearson Custom Publishing. ISBN 0-536-34228-8.
  5. ^

External links

Wikimedia Foundation. 2010.

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