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Net Asset Value

When you buy a fund, the share price is called the net asset value. This is, and is not what it seems.

The calculation seems simple enough but is more complicated that it looks. It can give a somewhat understated view of the funds performance, but so often, it is used as the simple way of calculating it.

If you were to divide the total worth of the fund, say $1 billion dollars in assets (stocks, securities owned) by the number of shares, say 100 million, that have been issued in the fund, you would arrive at the net asset value or NAV. This is calculated by SEC rules at the end of each business day. In our example, the NAV would be $10. If the assets in the fund increase in market value, then the NAV would also increase.

But hidden behind the NAV are the sale of stocks within the fund, winners or losers. This effects the NAV because of the taxes that might have to be paid on the gains.

When a mutual fund company pays capital gains at the end of the year, the NAV may drop although the change in the investors wealth has increased. They now own more shares if they have chosen reinvestment. Dividend payments may decrease the NAV, but also increase the wealth of the shareholder. Splits have an effect on NAV, and if this happens without your notice, this can be a cause for alarm although nothing really has changed.

The best way to calculate performance: Take the amount invested less the amount in the fund (this includes any dividends and distributions) and divide it by the number of years you have held it. A $1000 invested ten years ago that is worth $6000 can be considered using this method as a 500% gain.

But this also only gives you a rough idea. All the figures that accompany fund performances here at the BCD are done on an annualized or cumulative basis show total return.

And then there is compounding...