 Personal Finance PowerPoint Presentation, Net Asset Value in AV. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia, Net Present Value in AV, which you can find online. Take a look at the references, resources, continue your research from there. This by James Chen, updated July 22, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping in mind the two major categories of investments that being the fixed income, typically the bonds and the equities, typically the common stock. Also keep in mind other tools you might be using such as mutual funds and ETFs to help you to diversify as opposed to, for example, investing solely in individual stocks, individual bonds. Keeping that in mind, we're asking, what is Net Asset Value in AV? Net Asset Value is the net value of an investment fund's assets, less its liabilities, divided by the number of shares outstanding. So for investing in a fund such as a mutual fund, for example, that's going to be pooling money together, pooling that money together so that will help us as individual investors be able to diversify with less overall investment in general. Then we've got to value that fund. So the Net Asset Value is the net value of an investment fund's assets, less its liabilities, divided by the number of shares outstanding. So most commonly used in the context of mutual fund or an exchange traded fund, that being the ETF, the NAV, the Net Asset Value, is the price at which the shares of the funds registered with the U.S. securities and exchange, the SEC regulatory body, are traded. So understanding Net Asset Value, the NAV, for companies and businesses, entities, the difference between the asset and liabilities is known as net assets or the net worth of the capital of the company. So when we think about the balance sheet of a company, we're thinking where people stand as of a certain point in time, assets representing what the company has from a company standpoint. They might have cash, they might have property, plants, and equipment. For example, we're going to try to value those assets. And then the liabilities and equity, in terms of the accounting equation, represent who has claimed to those assets, either third-party liabilities like a bank or the owners, the shareholders in that case. You can also think of it as assets minus liabilities equals the equity. Therefore, the equity in total is, in essence, the kind of book value of the company. In other words, if you were to liquidate the company, then you could think of the assets as what they would get in cash, the liabilities, the third parties that they would have to pay off, the difference being the equity net assets, which is what would be distributed if it was valued at book value, if they were able to get the same amount of cash. For example, for the assets that they sold. So the term NAV net asset value is applied to the fund valuation and pricing, which is arrived at by dividing the difference between assets and liabilities by the number of shares held by the investor. So if you take that net value then on the fund, then we're going to try to allocate those out to the number of shares. So we got a per share net asset value, which can be thought of as, you know, the value on a per share kind of basis. The funds NAV represents a price share value of the fund, which makes it easier to be used for valuing and transacting the fund shares. So obviously we want to take that value allocated over like these equal units in a similar way as a company values its ownership through equal kind of stocks. And the fact that they're all got those equal units allows it more easily to be tradable. So NAV net asset value is often close to or equal to the book value of a business. So the net asset value NAV assets minus liability divided by the total number of outstanding shares is the formula. Companies considered to have high growth prospects are traditionally valued more than NAV might suggest. NAV net asset value is most frequently compared to market capitalization to fund undervalued or overvalued investments, mutual funds and NAV. So oftentimes we're thinking about the NAV net asset value as it applies to basically, you know, the mutual funds where we're pooling the money together in order to be able to diversify, get the benefits of that pooled money being able to invest in different things more so than we could do on our own with a limited amount of resources. Mutual funds collect money from a large number of investors then use that money to invest in securities such as stocks, bonds and money market instruments. Each investor gets a specified number of shares in proportion to their investment amount. The pricing of each share is based on the NAV, the net asset value. Like a stock whose price changes are posted throughout the day, mutual fund pricing is based on the end of the day methodology based on the activity, the security in the fund. So in other words, if we imagine this fund here that we are investing in, we're trying to pool our money together, then the fund is going to be buying these stocks and the bonds and whatever investments that are going to go into the fund in accordance with whatever restrictions we have on the funds, then clearly we have to value what the assets, the underlying assets of the fund are and we then need to value that on kind of a per unit type of basis. When you think about the stocks themselves, individual stocks, they are selling on the market so we can kind of value the individual stocks as they are traded, if they're traded on the market because all the stocks are basically the same. When you're looking at a mutual fund, you're typically having the mutual fund be managed and then you're going to have to look at all the underlying value or stocks and whatever the investments are, which individually can be determined by the market because those are things that are trading on the market to help you to get the value of the fund itself. Therefore, and that's going to be kind of like the net asset value. But you can't really do that or oftentimes you're not going to do that here during the trading day all the time. You're going to do it periodically, oftentimes basically at the end of the day. So at the end of the trading day, managers of a mutual fund compute the closing price of all the securities within its portfolio, adds the value of any additional assets, accounts for liabilities and calculate NAV based on the number of outstanding shares. NAV is close end funds versus open end funds. So now we got the concept of a close end fund versus an open end fund. So an open end fund can issue an unlimited number of shares does not trade on exchanges and is priced each day at the close of trading at their NAV net asset value. So these are the ones we often think of with like mutual funds. They're not trading in the same way on the exchanges as say stocks themselves, but they're going to be valued as of the end of the day based on what underlying assets and the net asset value then. So most mutual funds such as those in 401k plans. So when we think about our retirement plans like a 401k, 403b, possibly an IRA, for example, are open end funds, meaning the funds that they're going to use and I would typically think of the IRA or the 401k plan. The retirement plans is kind of an umbrella and the funds are underneath. In other words, you could have the funds, you could invest in similar kind of funds outside of the umbrella of a retirement plan. The 401k plan, you know, so that's how I would typically think of it. Because you're putting money under the 401k plan, not because they're unique investment types in terms of how the investment works, but because you're getting a tax benefit for the 401k plan in exchange for restricting the capacity to pull the money out. So close end funds are listed on a stock exchange trade similarly to securities and can trade at a price that not equal to their NAV. ETFs trade like stocks and their market value can differ from their actual NAV. So now we're talking more like investment tools here that aren't going to be valued kind of like at the end of the day, but they're going to act more like individual stocks on the market, which has its pros and cons. One of the pros is if you're trading these funds, for example, similar to stocks kind of day trading them or want to trade them more actively, then it could be more useful to not have them valued at the end of the day. But for long-term investors, that might not be as big of a problem. So this allows for profitable trading opportunities for active ETF traders who can spot timely opportunities. So again, if you're kind of actively trading in the market where many long-term investors like in a 401k plan are not, they're long-term, then that could be a benefit on the ETFs because you can trade during this. So similar to mutual funds, ETFs also calculate their NAV, net asset value daily at the close of the market for reporting purposes, but also calculate and disseminate intraday NAV multiple times per minute in real time. So NAV, net asset value and fund performance. Fund investors often try to assess the performance of a mutual fund based on their NAV, net asset value differentials between two dates. So an investor may compare the NAV on January 1st to the NAV on December 31st and see the difference in the two values as a gauge of the funds performance. So in other words, now we're looking at a fund here that has funds within it. So obviously when we're trying to value it, we want to value the fund as kind of like as if it was its own separate thing, like a separate stock in and of itself in essence, even though it's really a compilation of a bunch of values within it. And one way to do that is to kind of compare the NAVs over time or across time. However, changes in NAV between two dates aren't the best representation of mutual fund performance. Mutual funds commonly pay out all of their income, like dividends and interest earned to their shareholders. So it's kind of like when we're valuing the stocks. Remember when we're valuing the stocks, one thing we're trying to do on the stocks is get a return in terms of the increase in the price of the stock, hopefully so that we can sell the stocks possibly in the future timeframe. But we're also going to be getting possibly dividends and if it was bonds interest from it as well. And that's another component of the income. So when we're trying to value what is actually happening, we got to take into consideration in a similar fashion with the mutual funds. For example, the increase in the value as well as the payments that we got in terms of the dividends and the interest. Now, if you're in a 401k plan or something like that, there might be like reinvestments. You might be reinvesting like the dividends and the interest if that's a capacity or an ability to have within a long-term retirement type of plan. Additionally, mutual funds are also obligated to distribute the accumulated realized capital gains to the shareholders. So as these two components, income and gains are regularly paid out, the NAV decreases accordingly. Therefore, though a mutual fund investor earns income and returns, individual earnings are not reflected in the absolute NAV net asset values when compared between two dates. A reliable measure of mutual fund performance is the annual total return, which is the actual rate of return of an investment or a pool of investments over a given evaluation period. Investors and analysts also look at compounded annual growth rate, that's the CAGR, which represents the mean annual growth rate of an investment over a specified period longer than one year. So example of NAV net asset value calculation, assume that a mutual fund has $100 million worth of total investment in different securities. So we've got multiple people putting money into the mutual fund and they've got 100 million worth of total investments that are now buying different securities that are in a line with whatever restrictions the management of the mutual fund has, which is calculated based on the day's closing price for each asset. So it also has $7 million of cash and cash equivalents on hand as well as $4 million in total receivables. Accrued income for the day is $75,000, the fund has $13 million in short-term liabilities and $2 million in long-term liabilities. Accrued expenses for the day are $10,000. The fund has 5 million shares outstanding. Using the above formula, the NAV is calculated as the NAV, you've got the $100 million, that's the $100 million worth of total investment, plus the $7 million. So it has $7 million cash, so that's the cash it has, plus the $4 million total receivables, that's another assets, and then we have the $75 million, that's the accrued income for the day. So and then minus the $13 million short-term liabilities and the $2 million, which was the long-term liabilities, plus the $10,000 accrued expenses, and then we're going to divide that by the $5 million, which was, I believe, the number of the shares. Now there it is, $5 million shares outstanding, and that gives us our $19.21. For the given day, the mutual fund shares will be traded at $19.21 per share. What is NAVPS? The net asset value per share, the NAVPS of a fund, is reported with its price, quote, with a broker or online financial portal. This value differs slightly from the fund's actual market price, since NAVPS is calculated once per day, while the asset held by a fund may change in price throughout the day. What are the trading timelines for NAV? Well, NAV, net asset value, is computed and reported as of a particular business date. All of the buys and sell orders for mutual funds are processed based on the cutoff time at the NAV of the trade date, and regulators, if regulators mandate a cutoff time of 3.30 p.m., then they buy and sell orders received before 3.30 p.m. will be executed at the NAV of that particular date. Any orders received after the cutoff time will be processed based on the NAV of the next business day. What is the difference between an NAV, net asset value, and shareholder equity? Equity is calculated including intangible assets, which can include items like patents, while NAV is calculated using only the tangible assets. So you've got this component of intangible assets. Those are the things that have value that they're putting on the books that you can't physically kind of touch. They're intangible. What's the bottom line? Net asset value is the net value of an investment fund's asset less its liabilities divided by the number of shares outstanding. Funds can be open or closed, and the pricing of each share is based on NAV net asset value. The price of each fund share is reflected as the NAVPS or per share value.