If you’re a mutual fund investor, the term NAV is a figure you need to keep tracking all the time—just like stock investors watch stock prices. But for the general public who are still not familiar with the world of funds, what exactly is NAV? Why should you care? In this article, I’ll take you to learn this number in more depth. Once you understand NAV well, you’ll be able to use funds as an investment tool more effectively.

NAV stands for Net Asset Value, or the total value of assets based on market prices. It’s a commonly used term in mutual fund and ETF investing. This figure represents the net value of all the assets the fund holds. It comes from calculating the market value of the various assets the fund holds on a daily basis (Mark to Market), then subtracting the fund’s liabilities and expenses—so investors can see the true value of the assets based on current market conditions.

When you divide the total NAV by the total number of investment units, you get the NAV per unit. This number is updated every day and is used as the buy/sell price for investment units for investors. NAV per unit may look similar to a stock price because it’s used as a trading price. However, the difference is that stock prices are determined by negotiation between buyers and sellers in the stock market, reflecting the demand and supply for that stock. In contrast, NAV per unit is a price that reflects the value of the fund’s assets based on the previous day’s closing market price. Put simply, NAV per unit is more similar to book value per share than to the stock price itself.

The calculation of NAV for a typical fund or ETF is straightforward. The formula is: NAV equals the market value of assets, plus accumulated returns and cash, minus the fund’s expenses and liabilities. Then, NAV per unit equals the total NAV divided by the total number of investment units. For example, Fund Z has assets—specifically, a hotel—worth 10 million baht. It holds Stock A with 1,000 shares, with a closing price of 1,000 baht per share. There are no liabilities, no expenses are considered, and it issues 200,000 investment units. Therefore, NAV equals 10 million baht plus 1 million baht, which equals 11 million baht. NAV per unit is then 11 million baht divided by 200,000 units, which equals 55 baht.

As time goes on and the value of the assets held by Fund Z increases, the NAV calculated will also rise, allowing unit holders to make a profit. Conversely, if the value of the assets declines, NAV will decrease, and unit holders will incur a loss.

Investors can use NAV to evaluate a fund’s performance. A fund that can grow its NAV over the long term—compared with other funds with similar asset types and similar investment policies—indicates that the fund can manage its assets well, which will generate profits for unit holders. On the other hand, a fund whose NAV remains relatively stable or grows slowly may suggest that management isn’t as good as it should be.

However, there are some cautions when looking at a fund’s NAV per unit. First, the NAV you see today is the price from the previous day. It’s used for tracking performance. Actual buy and sell transactions take place after the market closes and are announced the next day, so investors don’t know the exact trading price at the moment. Second, NAV per unit does not reflect whether the fund is expensive or cheap—it only reflects the value of the assets the fund holds. A higher NAV does not automatically mean the fund is overpriced; you also need to look at the quality of the assets and the investment policy. Third, some types of funds have NAV that declines over time. For example, a leasehold real estate fund can have its NAV drop to 0 when the lease term ends. Investors should be mindful of this.

Once you understand that NAV is an important figure for mutual fund investors, you can use it to make smarter investment decisions. NAV per unit determines the buy and sell prices and affects your profits and losses. Therefore, understanding NAV well is a key to investing confidently through funds—and with a better understanding.