Navigating the NAV

Understanding net asset value can be key to understanding how different fund types work

Adam Zoll 3 October, 2012 | 6:00AM

Question: When I check the quote pages for funds on Morningstar.co.uk the share prices are expressed as "NAV." Why is this?

Answer: Every quote page for open-end funds on Morningstar.co.uk has a quoted net asset value (NAV) for the fund. At the most basic level, net asset value is the current price for one unit of a fund. Net asset value, as the name suggests, reflects the value of the fund's net assets (assets minus liabilities, such as the cost to operate the fund) divided by the number of shares. Below the fund's closing price (NAV), you'll find the percentage by which its NAV changed relative to the previous trading day.

NAV can be a confusing concept for some investors because it's less straightforward than stock price, which is determined by the market, can be tracked throughout the day, and is easily understood to represent the price of one share of a company's stock. An open-end fund, on the other hand, is a basket of stocks (and/or bonds and cash) that doesn't trade on a market and which has its share price determined by the fund company after the market closes. To calculate a fund's NAV, the fund company totals up the value of all the securities in the fund's portfolio, keeping a small slice of the total assets for itself as payment for running the fund. What's left over is the fund's net asset amount, which is then divided by the number of shares outstanding to provide fund investors with an idea of how much each share is worth.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.

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