The mutual fund NAV (Net Asset Value) is the price one share of a given mutual fund trades for. It is semi-analogous to a stock’s sale price, but not really for a few reasons we’ll discuss shortly. Just like with stock prices, the mutual fund NAV doesn’t correlate at all with the investment-worthiness of a mutual fund. A fund with a $20 NAV isn’t twice as expensive as one with a $10 NAV from an investment valuation perspective. Similarly, a $15 NAV doesn’t mean a given fund is a better value than one with a $30 NAV.
The Mutual Fund NAV
What Does It Mean?
In a few words: not much. The sponsoring mutual fund company picks an arbitrary number for the fund’s NAV when it opens the fund, often around $10 and always a nice, round number. There is really no rhyme or reason to it.
How Is It Determined?
Unlike stocks, bonds, or exchange traded funds, mutual funds trade only once per day. All orders throughout the day are aggregated and executed at a single price after the end of the trading day, which is based on the weighted average NAV of the underlying stock and bond holdings. Traditional open-ended mutual funds always trade at their Net Asset Value, no more, no less. ETF’s, on the other hand, can and usually do trade at a small premium or discount to their NAV.
Technically, a mutual fund’s NAV is defined as the fund’s total assets – total liabilities divided by the number of outstanding shares.
How Do Mutual Fund Companies Make Sure Their Funds Always Trade At NAV?
Open-ended mutual funds, as they are sometimes called, have a potentially-infinite number of shares. When you invest money in an open-ended mutual fund, you aren’t buying shares from another investor. You are, in fact, buying completely new shares directly from the mutual fund company. Put another way, every share you buy increases the total number of outstanding shares of that mutual fund by one. Since investors aren’t all trying to out-bid each other for a limited number of shares, the price will always match the value of the underlying assets (minus liabilities) divided by the total number of shares.