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How Is Net Asset Value (NAV) Of Mutual Funds Calculated?

Read this simple guide to understand how the Net Asset Value (NAV) of a mutual fund is calculated. Find out why mutual funds don’t update their NAV in real-time.
May 6, 2021

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Mutual funds operate differently from other assets like stocks, bonds, and ETFs. They’re not actively traded and have a robust portfolio of multiple securities.

The question then arises, how do you gauge the price of a mutual fund? The answer is Net Asset Value (NAV). In this blog, we’ll simplify NAV by telling you what it is and how NAV calculation takes place.

What Is Net Asset Value (NAV)?

Net Asset Value (NAV) is an indicator of the net market value of an asset. NAV is primarily used to describe the buying or selling price of mutual funds and ETFs

Mutual funds collect money from various investors and use the capital to buy stocks, bonds, and other securities. Every investor gets a piece of the pie but the pie itself is too diverse and large. 

Thus, NAV is necessary to estimate the number of units that an investor will get in proportion to their investment in the mutual fund. The NAV is nothing but the market value per share of a mutual fund. 

By the way, we’ve simplified the jargon surrounding mutual funds. Read all about it here 

How To Calculate Mutual Funds NAV?

Mutual fund Net Asset Value or NAV calculation can be done in 5 easy steps:

1. Calculate the total assets

2. Calculate the total liabilities

3. Subtract the total liabilities from the total assets

4. Divide this figure by the total number of outstanding shares

The final NAV calculation would look like this:

(Total Assets - Total Liabilities)

------------------------------------

Total number of outstanding shares

When Does A Mutual Fund Update The NAV?

The NAV of a mutual fund is updated at the end of each trading day. There’s a reason for this. Mutual funds are not traded in real-time like stocks or ETFs. 

Instead, they have a portfolio of stocks, bonds, cash and cash equivalents, receivables, and more whose value settles or changes at the end of each trading day.

The mutual fund Asset Management Company (AMC) will examine their portfolio when the trading day ends to calculate their total assets and total liabilities on the given day. The AMC will then calculate the NAV. 

Summary

The Net Asset Value or NAV calculation can help understand the share you’ll receive in a mutual fund based on the money you invest. NAV calculation can be done in 5 easy steps using the formula: (Total Assets - Total Liabilities) / Total number of outstanding shares.

FAQs

Q. What Does NAV Mean?

Ans. Net Asset Value (NAV) indicates the per-share market value of a mutual fund. In simple terms, it’s the number of units of a mutual fund you’ll receive based on your investment. 

Q. Is A Higher Or Lower NAV Better?

Ans. In truth, the NAV plays a minor role in your mutual fund investment. At the end of the day, it’s the returns that the mutual fund generates that will eventually help you grow your wealth. 

Think you know all about mutual funds? Take this 1-minute quiz and win a free consultation with a Cube Wealth Coach if you get 8 or more right!



Shriram Shekhar
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.

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