Net Asset Value Per Share

net asset value per share (NAV)

A valuation of an investment company's shares calculated by subtracting any liabilities from the market value of the firm's assets and dividing the difference by the number of shares outstanding. This factor illustrates the amount a shareholder would receive for each share owned if the fund sold all its assets (stocks, bonds, and so forth) at their current market value, paid off any outstanding debts with the proceeds, and then distributed the remainder to the stockholders. In general, net asset value per share is the price an investor would receive when selling a fund's shares back to the fund. Net asset value per share is similar in concept to book value per share for other types of firms.

Case Study Net asset value, the Holy Grail for mutual fund investors, isn't always what it indicates. A mutual fund's shares are issued and redeemed at a price based on the fund's net asset value. Net asset value, in turn, is based on the value of securities held in a fund's portfolio. A mutual fund with 100,000 shares outstanding and holding a portfolio valued at $1 million has a net asset value of $10. An accurate net asset value depends on an accurate valuation of assets in the portfolio. Valuation isn't a problem when a mutual fund owns large publicly traded securities. Valuation can be a problem when a mutual fund holds securities that are seldom traded. In 2000 two high-yield municipal bond funds operated by Heartland Advisors, Inc., of Minneapolis slumped in value when the funds reduced the values at which bonds were being carried in the two funds' portfolios. The one-day declines amounted to a mind-boggling 77% for one fund and 44% for the other fund. During the next month the two funds increased in value by 24% and 7%, respectively, after Heartland directors assumed the responsibility of pricing the funds' bonds, which had earlier been priced by an independent firm. Accurate pricing of securities can be particularly difficult in cases in which liquidity is limited, as is the case with many small issues of nonrated debt. Heartland fund shareholders filed numerous federal lawsuits alleging that the funds were carrying the bonds at inflated values.

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Net Asset Value Per Share

The expression of the value of a company or fund per share. In the case of a mutual fund, this is the per share prorated value of the securities underlying the fund. It is calculated once per day at the end of the trading day and functions as the share price of the mutual fund for the next trading day.

In the case of an exchange-traded fund, closed-end fund, or stock, this is the expression of the underlying value of the company or fund per share. That is, it is a statement of the value of the company's assets themselves minus the company's liabilities and the difference divided by the number of outstanding shares. One way of thinking about the net asset value per share is that it is the underlying value of the share, not the value dictated by the supply and demand of shares. Because cost accounting tends to undervalue the value of certain assets, the net asset value per share is usually lower than the market price of shares. It is also called the book value per share.