Why is NAV important to fund investors, and how does it differ from stock prices?

For those who are new to the investment fund industry, the term NAV (Net Asset Value) or Total Asset Value at Market Price may sound confusing. Many people think it is similar to stock prices, but in reality, these two have completely different methods of calculation and determination of price.

What is the true NAV?

NAV is the total net asset value that a fund or ETF holds. This figure is derived by valuing all assets (Asset), adjusted for market prices each day, then subtracting liabilities and expenses. The resulting number reflects the actual value of the fund based on current exchange rates.

When dividing NAV by the total number of units outstanding, we get NAV per unit, which is the price used for buying and selling fund units for investors. This figure is updated daily according to changes in the assets held by the fund.

How does NAV differ from stock prices?

Although NAV per unit and stock prices are both used as trading prices for investors, their origins are entirely different.

Stock prices result from buy and sell negotiations between buyers and sellers in the (Exchange) at any given time. The prices thus reflect market demand and supply, and can be higher or lower than the intrinsic value of the company.

NAV per unit is calculated from the actual value of the assets held by the fund at the previous day’s closing price. It can be considered similar to Book Value Per Share (BVPS) or the book value per share, rather than the market trading price. In other words, NAV reflects the true asset value, unaffected by the emotional trading behaviors of investors.

How to calculate a fund’s NAV

Calculating the NAV of a typical fund or ETF is straightforward.

NAV formula: NAV = (Market value of assets + Accumulated returns and cash) – Expenses and liabilities of the fund

Then, NAV per unit = NAV ÷ Total outstanding units

Let’s look at an example: Suppose Fund Z has assets consisting of a hotel valued at 10 million baht and 1,000 shares of Stock A, each priced at 1,000 baht (Previous day’s closing price). The fund has no liabilities or expenses, and 200,000 units have been issued.

NAV = 10,000,000 + (1,000 × 1,000) = 11,000,000 baht

NAV per unit = 11,000,000 ÷ 200,000 = 55 baht

Over time, if the prices of stocks or hotels increase, NAV will rise accordingly. Investors holding units will see gains. Conversely, if assets decrease in value, NAV will decline.

What does NAV indicate, and how should investors use it?

Smart investors use NAV to evaluate the management capability of a fund by comparing long-term NAV growth with other funds that have similar asset types and investment policies.

If a fund can increase its NAV better than others, it indicates good asset management and potential for future profits for unit holders. Conversely, a fund with stagnant or slow-growing NAV may suggest poor asset management, prompting investors to consider changing their investment products.

Important warnings when tracking NAV per unit

Although NAV and NAV per unit are key indicators, investors should be aware of the following:

First: The current NAV per unit reflects the previous day’s value. It is used for tracking, similar to the actual buy/sell prices, which are determined after the end of the trading day and announced as NAV the next day. Therefore, investors do not know the exact transaction price at the time of order submission, only an estimate.

Second: NAV per unit does not indicate whether a fund is over- or under-valued. A high number may result from high asset values or a small number of units outstanding. Making investment decisions based solely on high or low NAV is insufficient. It is necessary to evaluate asset quality, investment policies, and other conditions of each fund.

Third: Certain types of investments may cause NAV to decrease continuously until it reaches zero. For example, leasehold real estate funds with lease rights may see NAV decline to zero upon lease expiration. Investors should carefully study these regulations.

Summary

NAV per unit is a crucial figure used to determine the buy/sell price of investment units and directly impacts the profit or loss an investor will receive. Compared to stock prices, which are driven by supply and demand, NAV better reflects the true value of assets.

By understanding NAV correctly, investors can use this figure to analyze fund performance and make more informed investment decisions.