Example of Adjusted NAV Calculation
The adjusted net asset value of a mutual fund investigates the relationship between the NAV of the mutual fund and a dividend payout. The net asset value of a mutual fund is adjusted according to the dividend payments, but this doesn’t have an impact on the performance of the mutual fund. Simply put, the adjusted NAV is the net asset value of the mutual fund adjusted for dividend payments.
The reason that the net asset value needs to be adjusted is because the NAV is reduced by an equivalent amount to the dividend. Therefore, if the net asset value is not adjusted, the calculated returns of the mutual fund will look lower, although they aren’t.
To illustrate how important it is to adjust the net asset value to the dividend payout, in the following scenarios we calculate the total return of the mutual fund with unadjusted and adjusted NAV.
Scenario 1: unadjusted NAV
To calculate the total return of the mutual fund, we consider the increase in its net asset value, without any dividends or distributions to shareholders.
In the previous example, we have calculated that the net asset value is $84.6. We assume that this is the net asset value in the beginning of the fiscal year and that during the year the company has a dividend of $8 which is not distributed. We also assume that at the end of the fiscal year, the net asset value is $100.
By excluding the $8 dividend from the return calculations, we derive that the total return of the mutual fund is:
($100 - $84.6) / 100 = 15.4%
Scenario 2: adjusted NAV
With the same data, by including the $8 dividend in the return calculations, we derive that the total return of the mutual fund is:
($100+$8) - $84.6 / 100 = 23.4%
As already mentioned, by leaving the net asset value unadjusted to the dividend payout, the returns of the mutual fund seem lower, while, in fact, they are higher.