What is the Net Asset Value and Why is it Important for any Firm?

Investment

The net asset value refers to the actual value of an entity. It can be calculated as total value of the entity asset subtracting the total value of the liabilities.  It is basically used to represent the price of a given fund on the basis of it’s per share or unit for a particular date/time. This term is most commonly used in the fields of exchange traded fund or the mutual funds. The net asset value is the amount at which the funds are registered in terms of per share or unit. It represents the total value of the equity and is often divided by the total number of shares which is held by the investors which is called the net asset value per share. The net asset value is also termed as the security accounting, portfolio accounting or the investment accounting. Generally Fund accounting results in such record keeping activites like the net asset value.

Role of NAV in any firm

Now any of that business which deals with financial products or equities and requires the involvement of assets and liabilities are requires to have the net asset value (NAV). So basically the net asset value or the NAV is the calculation of the difference between the values of total asset and the total liability when talked in the context of either companies or the business entities. And when you divide this difference by the number of shares/units which are held by the investors you will get fund valuation and pricing. So one can say that in terms of companies or business firms, the fund’s NAV are sued to represent the value of per share of any particular fund which in turn is used for the valuing and transaction process in the fund shares.

How to calculate the Net Asset Value?

The formula for the net asset value is given as-

Net Asset Value = (Assets – Liabilities) / Total number of outstanding shares

The role of NAV in the working of a fund

The efficient working of a fund majorly depends on the amount of the money collected by a number of different investors. Then the total capital which is collected is invested in a several stock and different financial securities. Now the division of the shares depends on the investment that is made by the investor. And once the shares have been distributed one is free to sell them and make profit out of it. Now here for the regular buying and selling of these fund shares only starts once the fund is launched so to set the price of these shares a mechanism is required which is called the NAV.

Role of NAV in measuring the investment performance of any firm

NAV is used by the fund investors to calculate the performance of mutual fund by analyzing the difference of the two funds on two different specified dates. Also one uses the NAV to determine the potential opportunities for investment and to view the holding of their portfolios.

Conclusion

Thus NAV is an essential parameter to any firm by as they help in determining the performance of that particular firm and also in analyzing opportunities in which one can make potential investment to have more profit.

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.