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Mutual Fund NAV – What Is It?

Mutual Fund NAV is an abbreviated form of the term “Net Asset Value.”

The “Net Asset Value” is the value of each share of any given open-end mutual fund at the end of the business day.

Here’s what happens:

The mutual fund — whether it’s an “open-end” fund, a “closed-end” fund, or an “exchange traded fund” — owns investments. It may own stocks, bonds, a mixture of stocks and bonds, and it may even own other less liquid investments like partnership interests or hard assets like precious metals or some other commodity. It doesn’t really matter what the mutual fund owns, what matters is “how much is it worth today?”

At the end of each business day, the mutual fund must determine the end-of-day value for each investment held in the portfolio. It totals this number, divides by the number of shares outstanding, and calculates the “Net Asset Value” per share.

For open-end mutual funds, this is the price at which trades entered the previous day will be completed. For closed-end and exchange traded funds, this is the price used to determine if the market price (the price at which the shares are trading in the market) are at a premium or a discount to the actual value.

Issues That Affect NAV

When a mutual fund owns only publicly-traded stocks, the NAV calculation is straight-forward. All of the information is public and is readily available. However, when there are non-publicly-traded holdings — or even lightly-traded holdings — in the portfolio, the NAV calculation can be problematic.

For example, what is that private limited partnership interest really worth today? Is it worth more than yesterday? If so, why? Maybe none of the shares of the private limited partnership have traded in months or even years… so how do you know how much it’s worth today?

The fact is… you don’t know.

The Dividend and Capital Gains Effect

Almost all mutual funds distribute to shareholders all income and all capital gains. Income is normally distributed monthly or quarterly. Typically capital gains are distributed at the end of the year, and may well come as a surprise (sometimes a BIG surprise!) as you’ll see in just a minute.

When income is distributed, the NAV goes DOWN. This is because the total value of the assets has been diminished by the amount of income that has been paid out.

Here’s an example:

Mutual fund XYZ has a NAV of $10.00 and then pays out a dividend of $1.00. The day after the dividend payout (assuming all of the holdings maintain the same value) the NAV of mutual fund XYZ is $9.00

The same thing happens when capital gains are distributed. Say Mutual Fund XYZ has a NAV of $10.00 again, but this time it’s the end of the year and they decide to pay out the capital gains of $2.00.

The day after the capital gains are paid out, the NAV would be how much? That’s right, it would be $8.00 since $2.00 was distributed to shareholders (again, we’re assuming that all of the holdings maintained their value and didn’t fluctuate).

NOTE: Remember – these capital gains come from gains on individual holdings in the mutual fund portfolio, NOT on the overall return of the mutual fund. So you could have a situation where the overall fund went DOWN for the year, but you get a big capital gain distribution. This happens when the mutual fund managers sell out a position and take a gain during the year, but overall the total portfolio is down for the year.

Mutual Fund NAV is Not the Best Gauge of Performance

If you look only at NAV, then you may be missing a big portion of what is actually going on, and you may end up confused and scratching your head. As a result,  NAV changes are not the most accurate gauge of performance. Look to the annual total return — and not just the mutual fund NAV — to see what really happened.

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