How fund NAV works

A fund is a pool of assets owned for its shareholders. It may hold securities, cash, accrued income and amounts receivable. It also owes liabilities, including accrued expenses and amounts payable. Subtracting what it owes from what it owns gives the net assets attributable to fund shareholders.

The per-share identity is

$$\text{NAV per share}=\frac{\text{assets}-\text{liabilities}}{\text{fund shares outstanding}}$$

Suppose the assets are $500,000,000 and liabilities are $2,000,000. Net assets, also called equity in this calculation, are $498,000,000. Divide by 10,000,000 fund shares and NAV is $49.80 per share.

This is an accounting value, not a forecast. A rising NAV means the value left for each fund share rose after expenses and distributions were reflected. It does not say what the next move will be.

Listed holdings can usually be valued from closing market prices. Cash is counted directly. Interest and dividends earned but not yet received are accrued as assets, while management fees and other expenses earned by service providers but not yet paid are accrued as liabilities. That matching keeps the calculation tied to the period in which income and costs arise.

Valuing a holding becomes harder when it has not traded recently or has no active market. The fund then applies the valuation policy in its documents, often using comparable securities, dealer quotes or a pricing service. The policy determines a fair value for the NAV calculation. It does not create an executable market price for the holding.

Shares outstanding also move. Subscriptions create fund shares and redemptions cancel them. Cash or securities enter and leave at the same per-share value, so an ordinary flow changes the size of the fund without by itself enriching or diluting existing holders.

A mutual fund normally strikes one NAV after the market closes. An order entered before the fund's cut-off receives the next NAV calculated, not the value displayed when the order was placed. This is called forward pricing.

That means the buyer does not know the exact dealing price at the time of the order. Everyone whose order qualifies for the same calculation receives the same NAV, subject to any sales charge or redemption fee stated separately. There is no intraday bid and ask between fund investors.

A distribution changes the NAV mechanically. When income or realised gains leave the fund for shareholders, assets fall by the amount distributed and NAV falls with them. A holder who receives or reinvests the distribution has not lost that amount merely because the NAV stepped down. Total return counts both the change in NAV and the distribution.

An ETF also calculates NAV, but investors trade ETF shares with one another on an exchange. Its market price is therefore set by current bids and offers. Price can sit above NAV, called a premium, or below NAV, called a discount.

For a price $P$ and NAV $N$, the percentage premium is

$$\text{premium percent}=\frac{P-N}{N}\times100$$

If price is $50.30 and NAV is $49.80, the dollar gap is $0.50 and the premium is about 1.004 percent. The ETF guide explains how creation and redemption let large institutions exchange ETF shares for the underlying basket, which tends to keep that gap contained.

The comparison needs values from the same moment. An ETF can trade while an overseas holding's home market is closed. In that case the exchange price may incorporate new information while the most recently published NAV still uses the old close. Calling the whole difference a mispricing would compare a current price with stale inputs.

A lower NAV does not make one fund cheaper than another in the valuation sense. Fund share counts are arbitrary subdivisions of each pool, so one fund can have a NAV many times another's while owning an economically identical portfolio. The number tells what one fund share represents, not whether the portfolio is a bargain.

NAV also needs distributions to become a return measure. A fund that pays income out will show a lower NAV than a fund that reinvests the same income internally, even when their holders have the same total economic result. Compare total returns over the same dates and after the same costs.

The ETF against mutual fund page compares how the wrappers deal. NAV is the common accounting anchor beneath both. This is educational material, not financial advice.