Mutual funds are registered securities that can be bought and sold by investors. These funds are collections of investments in various securities, as defined by the fund’s prospectus. Investors who purchase mutual funds are collectively pooling their investment dollars with other investors. This sum of funds is used by the mutual fund manager to buy and sell the securities within the mutual fund.
However, this fund management is not free. Fund managers charge investors via a built-in fee structure called an expense ratio. While there are numerous no-load mutual funds available, some funds will also levy a fee in the form of a “load” which is a sales charge made either when the investor purchases shares in the fund, known as a front-load, or when the investor sells shares in the fund, known as a back-load. The result of all these various charges, is that the value of the investor’s holding within the fund are not the same as other investors who may have different overall expenses. While each investor’s returns and value is tracked individually, there needs to be a generic way to report the overall status of the mutual fund to non-specific entities.
Net Asset Value, or NAV, is the value of the mutual fund based solely upon the values of the securities held within the mutual fund. That is, NAV represents the value of the mutual fund, and its subsequent movements without the affect of any sales charges or expense ratio, but with including any actual returns and costs associated with mutual fund transactions.
An easier way to look at is, is to think of NAV as what an investor’s holdings and performance would look like if they were allowed to participate in the mutual fund for free.
It is important to understand Net Asset Value because funds are often tracked, rated, and quoted, based upon their NAV, and NOT based on how they will perform for the investor. In other words, a mutual fund’s state returns based upon NAV represent a return that will be impossible for the investor to actually attain. Thus, it is imperative that investors determine the particular mutual fund share class that they will be investing in so that they can view the proper numbers relative to their actual investment.
In other words, investors in B shares should be sure to evaluate their investments and potential investments by looking at the returns for B shares and not for A shares, or for those calculated at NAV. While these reports will not include any sales charges paid by the investor, they will accurately account for the expense ratio of that particular share class.
Investors may use online investing calculators such as the ones provided by FINRA to determine the effect of sale charges or loads on their investments instead of blindly investing in whatever list of top mutual funds they find.