Net asset value

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Template:Refimprove Net asset value (NAV) is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended funds, though it may also be used as a synonym for the book value of a business.

There is no universal method of valuing assets and liabilities for the purposes of calculating net asset value, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation and any regulations that may apply.


Open-ended funds

Net asset value is most commonly used in the context of open-ended funds. Shares and interests in such funds are not traded between investors, but are issued by the fund to each new investor and redeemed back to the fund when an investor withdraws. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash.

As a numerical example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share", being the price at which the shares will be issued, is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be US$240m, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to 1/6th of the fund's value when he withdraws his investment, proportionately adjusted for any subsequent profits or losses.

The valuation of the assets and liabilities of an open-ended fund is therefore very important to investors. If the NAV in the above example had, with the same assets, been calculated as US$160m (and the NAV per share as $160), the investor would have been given 250,000 shares and would become entitled to 1/5th of the fund's value, significantly disadvantaging the existing investors.

In contrast, closed-end funds are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree it to be, which may not correspond to the fund's NAV. Publicly traded shares in such funds generally trade at a price below NAV.

Valuation of assets in open-ended funds

The NAV of a collective investment scheme (such as a US mutual funds or a hedge fund) is calculated by reference to the total value of the fund's portfolio (its assets) less money owed to lending banks, fees owed to investment managers and service providers and other liabilities.[1]

The portfolio's assets are generally valued by objective criteria established at the outset of the fund. Where assets are traded on a securities exchange or cleared through a clearing firm, the most common method of valuation is to use the market value of the assets in the portfolio (using, for example, the closing bid price or last traded price). The value of OTC derivatives may be provided by the counterparty to the derivative, who may be trading similar derivatives with other parties. Where there is no objective method of calculating the value of an asset, the fund manager's own valuation methods may be used.


In determining whether shares in a public company are a cheap or expensive investment, one tool used by investors is a comparison of the company's current market capitalization (being the price at which the market values the company) with its NAV. The NAV will usually be below the market price for the following reasons:

  • The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV.
  • The current value of a company's assets may be higher than the historical financial statements used in the NAV calculation.
  • Certain assets, such as goodwill (which broadly represents a company's ability to make future profits), are not necessarily included on a balance sheet and so will not appear in an NAV calculation.

A company's market value will not always be greater than its NAV. For example, analysts and management estimated that Liberty Media Corporation was trading for 30-50% below its net asset value (or "core asset value") in June 2007.Template:Fact Where a company's market value is lower than its NAV, it may be considered more profitable to wind the company up and sell off its assets individually rather than continue to run it as a going concern.

In contrast to fund valuation, the assets of a company will generally be valued for the purpose of a NAV calculation using the book value, the historical cost or the amortised cost of the company's assets, or an appropriate combination of the three.

Real estate investment trusts

NAV is one of the valuation indices of real estate investment trusts (REITs). NAV is normally quoted on a "per investment unit" basis where the value is divided by the number of total outstanding investment units. In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. The degree of premium/discount on individual investment unit prices relative to the per-unit NAV serves as the yardstick for assessment. The NAV index is synonymous to the adjusted price-to-book ratio applied in the world of stocks in which factors such as unrealized losses/gains of owned properties and brand values are reflected.

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