De-Mystifying NAV

NAV—it's an acronym that may seem a bit intimidating—but with a little background information, you'll understand what it means and why it's important to you. 

What Is NAV? 

NAV stands for net asset value, which is the market value of one mutual fund share. You may wonder how the market value of one share is determined, when there are so many shares in any one mutual fund. Here's how it's done. At the end of each business day (based on when the New York Stock Exchange closes), the value of all securities in a fund's portfolio is added up (which includes any income or earnings that have not been distributed to shareholders), expenses are then deducted, and the net figure is divided by the number of shares outstanding. This calculation results in the mutual fund's daily NAV. All mutual fund shares are purchased at NAV, plus any sales charge, if applicable, and this is called the public offering price. In the case of front-end load funds, a sales charge is assessed when you buy shares, therefore, the offering price equals NAV plus this sales charge. If you purchase a back-end load fund, a contingent deferred sales charge (CDSC) is deducted when you redeem shares. CDSCs are usually set up on a schedule that reduces by a certain percentage over a specified period of time. So, the longer you hold shares in such a fund, the lower the CDSC (or there may be none at all). 

What Causes Changes in NAV? 

Two primary reasons for changes in a mutual fund's daily NAV are: 

  • Capital appreciation or depreciation - Plays a major role in determining the net asset value of a fund. Increases and losses in the value of a fund's underlying securities makes up the difference between what you originally invested and the current NAV, which is unrealized until you redeem your shares. 
  • Distributions of dividends or capital gains - Influences NAV when paid. The fund's NAV will drop by the amount of the distribution on the date it's paid. A fund's dividend income is translated into an annual yield—a percentage rate of return over the amount invested. In other words, the amount of dividends generated over a year's time is expressed as a percentage of the investment. If you want to get really technical, the formula for calculating current yield is: 

    Annualized Dividend (or Interest) ÷ Current NAV 

    Putting this in real world terms, if a stock's NAV is $25, paying a total annualized dividend of $2.50, its current yield would be 10% ($2.50 ÷ $25 = .10 or 10%). 

    These types of changes in NAV are driven by numerous factors, such as market conditions, political events, financial health of underlying securities, interest rates, and currency fluctuations.

How Are Changes in NAV Expressed? 

Changes in a mutual fund's NAV are most often expressed as total return because it takes into account the fund's dividend yield, as well as capital appreciation (depreciation). To calculate total return, a fund assumes an initial investment at NAV at the beginning of the year and redemption on the last day of the year, with all dividends and distributions reinvested. Sales charges may or may not be included in the calculation. 

For more information about NAV and mutual funds, tap a valuable resource—your investment professional. 

Neither New York Life Investment Management LLC nor its representatives provide legal, tax, or accounting advice—please contact your own advisors.