Understanding Net Asset Value: A Practical Guide for Investors

Why do you need to know about NAV?

When you invest in a mutual fund or ETF, a natural question arises: how much is my investment really worth? This is where the concept of NAV comes into play as a fundamental tool to answer that question. Many investors are unaware of the importance of this metric, but it is essential for anyone who wants to track their investments with clarity and security.

What is NAV after all?

NAV, or net asset value ( in English), basically represents the real price of each share you hold in a fund. Imagine you have shares in an investment fund – the NAV is precisely the value that each of these shares actually represents.

To simplify: if a fund holds various assets (stocks, bonds, cash), the NAV reflects how much each share is worth within that set of investments. It's like dividing the total assets of the fund by the number of shareholders to see how much each one gets.

How does the NAV calculation work?

The mathematics behind NAV is simple and straightforward:

NAV = (Total assets − Total liabilities) / Number of outstanding shares

Let's break this down:

Total assets include all the securities, stocks, cash, and other assets that the fund holds. On the other hand, total liabilities are the obligations and debts that the fund needs to pay. The difference between these two values gives us the fund's net worth.

The circulating shares refer to the total number of shares that have been issued and are in the hands of investors (individuals, institutions, and even the company itself). Do not confuse with treasury shares, which are those that the company has repurchased and keeps stored.

Practical example of calculation

Suppose a mutual fund that has $500 million in investments but has $50 million in operational and administrative expenses. With 20 million shares distributed among investors, the calculation would be:

NAV = (500M − 50M) / 20M = US$ 22.50

Each share is worth US$ 22.50. When you buy or sell, the price will be close to this value ( possibly including additional fees depending on the institution ).

Updates and Transparency

A crucial aspect is that the NAV of mutual funds and ETFs is recalculated daily. At the end of the trading session, the new NAV is published, allowing you to know exactly the value of your shares on that day. This continuous update provides transparency and allows you to:

• Monitor performance: by comparing NAVs from different periods, you can see if the fund is increasing or decreasing in value.
• Make buy and sell decisions: knowing the fair price of the share, you can decide whether you want to buy more or redeem your shares.
• Understand your investments: the NAV reveals the real value of the assets, eliminating mysteries about what you actually own.

Different behavior in closed-end funds

Here things change. Closed-end funds are born with a fixed number of shares - unlike mutual funds and ETFs, which can create or redeem shares according to demand. After being launched in an initial public offering (IPO), their shares are traded on the exchange as if they were individual stocks.

In this scenario, the price of the shares does not strictly follow the NAV. Instead, it is determined by market supply and demand. Thus, a share can be traded at a premium (above the NAV) if demand is high, or at a discount (below the NAV) if investors lose interest.

Example: a closed fund may have an NAV of $20, but if demand is high, its shares are sold at $22 (premium). Conversely, if there is little interest, they drop to $18 (discount). These differences create opportunities, but also add complexity, as the price does not always reflect the true value of the fund's assets.

NAV in mutual funds versus ETFs

Both use net asset value, but with distinct dynamics:

• Mutual funds: the NAV is the direct purchase or sale price with the manager. Transactions occur once a day, after the market closes, always based on the NAV calculated at that moment.

• ETFs: although they have NAV, they are traded continuously on the exchange during operating hours, at prices that may diverge from the NAV. Despite this, the NAV remains an important reference, serving as a benchmark value for the fund's assets.

What drives the NAV?

The performance of the assets is the main driver of the NAV. If the fund's stocks, bonds, or other investments increase in value, the NAV rises. If they fall, the NAV decreases proportionally. Dividends and interest received also increase the net worth.

On the opposite side, administrative costs, operational fees, and other expenses reduce the NAV, as they are deducted from the fund's assets. This constant dynamic means that the net asset value is always changing, providing investors with an updated view of how their investments are performing.

Conclusion: Why NAV matters to you

Mastering the concept of net asset value is fundamental for any investor in funds. It provides clarity on what you actually own, how it is performing, and at what price it is being traded. Whether you are a beginner or experienced, knowing NAV and its determining factors allows for more informed and strategic decision-making. It is the compass that guides well-informed investments in the world of investment funds.