Why do fund investors need to understand NAV and how to evaluate investment performance?

For those who are new to the world of investing in (Mutual Fund) and ETFs, the term NAV is might sound like a complicated academic concept. However, in reality, this number is a key indicator that helps investors understand the true value of their investment units.

How does NAV evaluate a fund’s performance?

When assessing which fund performs well, investors often look at NAV that has steadily grown over the long term. A fund with the potential to effectively manage assets to increase value is usually reflected through the growth of NAV when compared to other funds with similar investment policies and assets. An increasing NAV indicates that the fund has generated real profits for its unit holders.

Conversely, if you notice that a fund’s NAV remains relatively flat or grows at a very slow rate compared to similar funds, this could be a sign that the fund’s asset management capabilities may be insufficient.

How is (Net Asset Value) (NAV) calculated and used?

NAV (Net Asset Value), also known as the total market value of assets, shows the overall value of all assets held by the fund based on current market prices. This measurement is widely used in fund and ETF investments to give investors a clear picture of the actual value of the assets they hold.

NAV is calculated by:

NAV = (Total market value of assets held + accumulated returns and cash) – fund expenses and liabilities

Then, dividing the NAV by the total number of units outstanding gives the NAV per unit, which is the actual price used for buying and selling units.

For example, if Fund X holds assets worth 8 million baht in real estate and 1,500 shares of Company B at a closing price of 800 baht per share, with no liabilities, the NAV of Fund X would be 8,000,000 + (1,500 × 800) = 9,200,000 baht. If this fund issues 250,000 units, the NAV per unit would be 9,200,000 ÷ 250,000 = 36.80 baht.

The difference between NAV per unit and stock price

Although NAV per unit and stock price are both used as trading prices, they have fundamentally different characteristics. Stock prices are determined by buy-sell negotiations between buyers and sellers in the market, reflecting current supply and demand. NAV per unit, on the other hand, reflects the true value of the fund’s assets, calculated from the previous day’s closing prices.

It is similar to using NAV as a representation of the book value per share (Book Value Per Share - BVPS) rather than the volatile market price.

Important considerations for investors when using NAV

The current NAV does not guarantee the actual buying or selling price

The NAV figure that investors see each day is the previous day’s NAV. Actual transaction prices occur after the market closes and are announced as the next day’s NAV. Therefore, when investors place buy or sell orders, the prices they receive will not match the NAV figures displayed in the app.

NAV figures do not indicate whether a fund is expensive or cheap

A high or low NAV per unit does not necessarily reflect the fund’s value. A high NAV might result from holding high-value assets or from a smaller number of units issued. Investors should examine the quality of the assets and compare actual performance rather than relying solely on the NAV number.

Some fund structures can cause NAV to drop to zero

Certain types of funds, such as leasehold investment funds (Leasehold), may see their NAV decrease to zero upon contract expiration. Investors should carefully read the investment conditions before making decisions.

Summary

NAV is an essential tool that helps fund investors understand the true value of their investments. By understanding how NAV is calculated and how to interpret it, investors can better evaluate fund performance and select funds aligned with their investment goals. However, remember that NAV is just one indicator; making sound investment decisions also requires considering other factors.