Funds: The Concept of Net Asset Value

What is Net Asset Value and why do you need to know it?

Some of you might be more familiar with investing in stocks, despite many actually having invested in funds somewhere. In this article, we will explain to you the most basic things that you will have to know — net asset value (NAV).

What is Net Asset Value?

To put it simply, the concept of NAV is like how you look at the price of a stock, if a stock price is $10, it means that in order for you to get one share in a company, it will cost you $10. If you buy it, and the share price rises by 20%, then you will now have a stock worth $12.

The same could be said of a fund. Just a little recap on how funds work, it is where investors like you and me pool their money and have a fund manager manage that money. Whatever buys and sells happens within the money pool will be done by the fund manager. He/she will buy whatever stocks or assets with that money and try to grow it.

Here’s a situation…

To understand the concept of NAV, imagine yourself in the place of a fund manager, but waaaaaay before that, when you’re just a normal investor who’s apparently good at it. What happened then is that your mom bragged too much about you to your aunts and they decided to test your skills.

Now, your aunt, your uncle, your cousin, your aunt who stays in the UK, and her best friend hand you a bunch of cash for you to invest — say, now you have $100,000 to manage. You are now a fund manager (assuming that the licensing stuff and everything are being put aside).

Assuming here’s how much everyone gives:

Aunt: $ 35,000

Uncle: $25,000

Cousin: $20,000

UK Aunt: $15,000

UK Aunt’s Best Friend: $5,000

The money pool can be divided into units of shares. How it can be divided is up to you. Assuming you consider each $10 as one unit (we use the term notional share value), then there would be 10,000 units under the fund that you managed. Now, each one of them has these many units (or shares) under themselves:

Aunt: 3,500 units

Uncle: 2,500 units

Cousin: 2,000 units

UK Aunt: 1,500 units

UK Aunt’s Best Friend: 500 units

How is the NAV of a fund calculated?

The NAV of a fund is calculated using the formula below:

NAV = (Value of all the assets — the expenses) / number of shares

Since you are managing their money, you won’t be doing that for free, right? You might take some commissions out of it for your hard work. Buying and selling stocks will also come with a cost, you have to pay the stockbrokers, for example. All of this will take into account how the fund is worth.

Now, assuming that the total expense of the fund is $2,000, here is how you can calculate the NAV:

NAV = (100,000–2,000) / 10,000

NAV = $9.8

Why does that matter?

The reason why these units are essential is because they tell how much everyone’s investment is worth — oh, and they can sell their parts as well — much like how stocks are. Assuming you manage to raise that $100,000 by 15%, the fund’s total worth is now $115,000. The NAV now is $11.3 per share. (Oh, and assuming that the expense cost is still $2,000).

If your cousin who has 2,000 shares wants to sell all of his shares, he can sell them for $11.3 each, and he will now get $22,600. Long story short, NAV goes up is good, NAV goes down is bad.

Just like shares in stocks.

Bottom line

· NAV tells you how much the price of each share in a fund is worth, having factored in the expenses.

· If the NAV increases, it is good news. If it falls, it’s bad news.

· Much like shares in stocks, you can usually buy or sell shares in a fund.

· Some funds can come with their own rules when it comes to withdrawal like you can’t withdraw until a certain period has lapsed, or you will be penalized.

· A fund’s total assets will be divided into shares that you can buy and sell.

· How it’s calculated: NAV = (Value of all the assets — the expenses) / number of shares

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