What is NAV and why does it matter?

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What is NAV?

NAV is an abbreviation that stands for Net Asset Value , and is usually referred to when speaking of collective investment schemes like ETFs , Mutual Funds and Unit Trusts. The NAV is representative of the value of the single units or shares that make the respective fund or trust. It is calculated by taking the total value of the assets held by the fund or the trusts and dividing it by the number of shares or units offered by the trust or the fund. The value of the NAV can change in value as the value of the assets in the trust or the fund appreciate or depreciate. The assets in these funds and trusts are usually shares in companies , but can also be holdings in other assets such as property , money or gold.

Why does this matter?

The NAV of a collective scheme may not always be reflected in the price and this is particularly true in the case of ETFs.ETFs are priced by the market and therefore the market conditions will influence the price of the ETF shares. Therefore, if there is a huge demand for the shares of an ETF the price for it may trade above the NAV, on the contrary if there is a low demand the shares in the ETF may trade below the NAV. Ideally you do not want to see too much of a difference between the NAV and the price at which it is trading at.

Before investing your money in an ETF , it is ideal to compare the trading price and the NAV. If there is a significant deviation between the NAV and trading price it can be to your advantage or disadvantage. Where it is trading below its NAV you will be able to invest in the ETF at a discount. This means that if it is trading above its NAV you may be overpaying for it. This is the flexibility that you are awarded when it comes to investing in ETFs that are priced live by the markets, in comparison to Mutual funds and Unit Trusts. Unit Trust are priced daily , purely based on the NAV of the trust. This price is not influenced by supply and demand, and may in some instances be a more favourable option for investors. The same applies to mutual funds ,when they are priced, the price of the shares in the mutual funs is based exclusively on the NAV of the fund, and not influence by supply and demand.

It is important to review the NAV of the shares or units in a collective investment scheme , as it provides as a guide on the true price of an investment or in some instances determines the price of the investment.

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