FAQs

Frequently asked questions - Net Asset Value

REITs - Reasons for REIT Investment

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What is net asset value (NAV)?

The net asset value (NAV) is a calculation that determines the price of a share in a mutual fund. While stock prices change within minutes (or even seconds), the NAV of a mutual fund is adjusted at the close of each business day, making it much easier for investors and brokers to track.

NAV helps an investor determine if the fund is overvalued or undervalued. When we talk of open-end funds, NAV is crucial. NAV gives the fund's value that an investor will be entitled to at the time of withdrawal of investment. In case of a close-end fund, which is a mutual fund with fixed number of units, price per unit is determined by market and is either below or above the NAV.

How is NAV calculated?

A mutual fund calculates its net asset value (NAV) by adding up the current value of all the stocks, bonds, and other securities (including cash) in its portfolio, subtracting the manager's fee and other operating expenses, and then dividing that figure by the fund's total number of shares.

NAV = (Fund Assets - Fund Liabilities)/Shares

Example: a mutual fund with assets of R1 000 000, liabilities of R100 000 and 100 000 shares:

NAV = (R1 000 000 - R 100 000)/100 000
= R9 per share
What is the difference between stock prices and NAV?

While the price of a stock and net asset value (NAV) have much in common there are five important differences between the two.

  1. Stock prices change throughout the trading day, but the NAV of a typical unit trust is calculated only at the end of each day based on the value of its underlying holdings at the time the market closes. When you purchase a unit trust, you buy units at the NAV as of that day's close. As a result, you don't necessarily know the exact NAV of the fund at the time you put in your order to buy or sell. If you place an order early in a given day, you're likely to get that day's closing price for the fund. If you make your order later in the day or after trading has ended, you'll get the following day's closing price.
  2. Stock investors typically specify how many shares they'd like to buy, and buy shares of a given stock in even lots. By contrast, most fund investors purchase funds in rand amounts rather than share amounts.
  3. Stocks have a fixed number of shares available. To change its number of shares, a company can either issue new shares or buy back its own shares in the market. By contrast, unit trusts generally have an unlimited number of units, and the number changes on a daily basis, depending on how many units investors buy and sell that day.
  4. You can estimate whether a stock is a bargain or not by comparing its current price to what you consider its "fair value" price, based on your projection for the firm’s ability to generate earnings. With unit trusts, however, the NAV is the sum of the current value of the fund's underlying holdings. But attempting to identify whether the unit trust’s portfolio is a bargain, while theoretically possible, would be a cumbersome process, particularly when you consider that many funds hold well more than 100 stocks or bonds.
  5. You can often use changes in a stock's price to gauge how well a stock is performing. Unit trusts, however, distribute any income or capital gains they realize to shareholders as dividends, which, in turn, causes their NAVs to fluctuate. Unless you account for such distributions, you could be underestimating a fund's actual performance by looking solely at its NAV. To accurately gauge a fund's performance, you need to examine its total return, which takes into account both the appreciation of the fund's holdings as well as any distributions the fund has paid out.