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| Net
Asset Value |
What It Is:
Most commonly used in reference to mutual or closed-end funds, net asset value
(NAV) measures the value of a fund's assets, minus its liabilities. NAV is
typically calculated on a per-share basis.
How It Works/Example:
A fund's NAV fluctuates along with the value of its underlying investments. The
formula for NAV is:
NAV = (Market Value of All Securities
Held by Fund + Cash and Equivalent Holdings - Fund Liabilities) / Total Fund
Shares Outstanding
Let's assume at the close of trading
yesterday that a particular mutual fund held $10,500,000 worth of securities,
$2,000,000 of cash, and $500,000 of liabilities. If the fund had 1,000,000
shares outstanding, then yesterday's NAV would be:
NAV = ($10,500,000 + $2,000,000 -
$500,000) / 1,000,000 = $12.00
A fund's NAV will change daily as the
value of a fund's securities, cash held, liabilities, and the number of shares
outstanding fluctuate.
Why It Matters:
Net asset values are like stock prices in that they measure the value of one
share of a fund. Also, they give investors a way to compare a fund's performance
with market or industry benchmarks (such as the Standard & Poor's 500 or an
industry index). However, some analysts argue that comparing long-term changes
in a fund's NAV is not as meaningful as comparing long-term changes in its share
price because funds periodically distribute capital gains to their fundholders,
thus reducing their NAV.
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