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Understanding Adjusted NAV of a Mutual Fund

written by: Christina Pomoni•edited by: Jason C. Chavis•updated: 7/27/2011

Lacking the sharp fluctuation of stocks, the NAV of a mutual fund is adjusted at the end of each trading session to reflect the individual values of the securities in the fund. Also, NAV is adjusted to the dividend payout for accurately calculated returns, giving an investor a deeper look.

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    Defining Mutual Fund

    A mutual fund is a type of investment that enables investors to invest their money in a variety of securities, including stocks, bonds, ETFs, REITs, and other publicly traded financial instruments. Each investor owns a number of securities and automatically a percentage of the total mutual fund portfolio. The fund’s assets are typically managed by a fund manager who possesses the skills and the experience to buy or sell in the aim of adding value to the shareholders’ investments. One of the major factors to look at when choosing the right mutual fund for you is the adjusted net asset value. This figure can be misleading when determining the actual value of a mutual fund.

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    Defining Net Asset Value (NAV)

    The net asset value (NAV) of a mutual fund is its assets minus its liabilities. Simply put, the NAV is what investors are required to pay to buy or sell one share of the mutual fund. Keep in mind any additional fees are not included in this amount. In accounting terms, NAV is also known as the book value of the mutual fund.

    NAV is calculated at the end of each trading session by adding up market values of all securities that the mutual fund owns, plus cash and equivalent holdings, minus management fees & commissions (liabilities), divided by the number of shares outstanding (weighted average number of shares).

    NAV = (Market value of all securities – Liabilities) / Number of shares outstanding

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    Example of NAV Calculation

    To illustrate how the NAV works in practice, we assume that a mutual fund sells 10 million shares for $8 per share. The total investments’ value of the mutual fund is the market value of all securities, which is 10 million shares x $8 per share = $80 million.

    If the management fees and commissions make up for $25 million and the weighted average number of shares in the portfolio is 650,000, the NAV is calculated as:

    NAV = ($80,000,000 – $25,000,000) / 650,000 = $84.6

    Therefore, the net asset value of the mutual fund is $84.6. Again, this represents the value that investors have to pay to buy or sell a single share. The NAV changes daily because the underlying net assets change as well as the number of shares outstanding.

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    Example of Adjusted NAV Calculation

    istockphoto 3691426-portfolio-report-brochure-unit-price-graph-investment-paperwork-document-blue 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.

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    Is NAV Really Important to a Funds’ Performance?

    The net asset value of a mutual fund is not important in weighing the fund's performance because mutual funds distribute their realized gains to shareholders. Therefore, adjusting or not adjusting NAV is important only in regards to a mutual fund’s total return.

    In fact, the NAV is irrelevant when investor select mutual funds for their portfolio. Besides, NAV is not the actual price of the mutual fund, but its intrinsic value that is calculated based on the fund’s current market price multiplied by the units an investor owns. But because the current market price is actually the sum of the current market price of all the assets that the fund owns, NAV changes daily and does not trade like the price of stock.