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This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (April 2008) |
Net Asset Value (NAV) is a term used to describe the value of an entity's assets less the value of its liabilities. The term is commonly used in relation to collective investment schemes. It may also be used as a synonym for the book value of a firm.
For collective investment schemes (such as US mutual funds and hedge funds), the NAV is the total value of the fund's portfolio less its liabilities. Its liabilities may be money owed to lending banks or fees owed to investment managers, for example.[1]
For companies, the NAV is the value of its assets less its liabilities.
For the valuation of assets and liabilities, different methods are used depending upon the circumstances, the purposes of the valuation or the regulations that may apply. For funds, the most common method of valuation is to use the market value of the assets. Other possible methods of valuation are:
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Usage
Funds
For open-end funds, shares and interests are not traded between investors but are issued and redeemed directly between the fund and the investor. The price of those shares or interests in the fund is determined by the NAV at the time when the investor subscribes for them or withdraws his investment.
In contrast, closed-end funds are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree to be the price, and might not correspond to the fund's NAV.
Companies
In determining whether a company is a cheap or expensive investment, one tool used by investors is a comparison of the company's current market capitalization (being the price that the market values the company at) with its NAV. The NAV will usually be below the market price for the following reasons:
- The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV.
- The current value of a company's assets may be higher than the historical financial statements used in the NAV calculation.
- Certain assets, such as goodwill (which broadly represents a company's ability to make future profits), are not necessarily included on a balance sheet and so will not appear in an NAV calculation.
A company's market value will not always be above its NAV. For example, analysts and management estimated that Liberty Media Corporation was trading for 30-50% below its net asset value (or "core asset value") in June 2007.[citation needed] Where a company's market value is lower than its NAV, it may be considered more profitable to wind the company up and sell off its assets individually rather than continue to run it as a going concern.
NAV(net asset value) Calculation in REITs
NAV is one of the valuation indices of REITs and be defined as the total value of assets held by an investment corporation less total liabilities. Normally, it is quoted on a per investment until basis where the value is divided by the number of total outsanding investment units. In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. The degree of premium/discount on individual investment unit prices relative to the per-unit NAV serves as the yardstick for assessmet. The NAV index is synonymous to the adjusted PBR applied in the world of stocks in which factors such as unrealized losses/gains of owned properties and brand values are reflected.
See also
References
- ^ CFA Institute. (2008). Derivatives and Alternative Investments. pg 177. Boston: Pearson Custom Publishing. ISBN 0-536-34228-8.
External links
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