What it means
A fund's net asset value (NAV) per share rises when its investments gain in value and falls when they lose. Looking only at the change in NAV, however, misses any dividends or distributions the fund paid to investors, because paying out cash reduces the NAV.
NAV return therefore adds distributions back to give the full picture. The calculation assumes distributions are reinvested, or at least counted at their value, so that an investor who took the cash and an investor who bought more shares are treated fairly.
Published fund fact sheets typically show this figure over one, three, five and ten years. NAV return is different from market return, sometimes called price return, for exchange-traded and closed-end funds.
Their shares trade on an exchange at prices that can sit above or below NAV, so the return an investor actually earned depends on the market price they bought and sold at, while the NAV return shows the underlying portfolio performance. For a business user, the number is helpful when choosing between funds for a corporate pension, surplus cash or an employee savings plan.
Comparing NAV returns over the same period, net of fees, shows which manager added more value from the investments, assuming the funds have similar risk. Several nuances matter.
Fees are already deducted from NAV, so the figure is a net-of-fees result, but taxes paid by the investor and any sales charges are usually not included. Past NAV return also says little about the future, and a strong figure over a short period can reflect luck as much as skill.
When reading a fact sheet, check the start and end dates and whether the figure is annualised or cumulative. A three-year figure of 30% is a cumulative gain, which works out at less than 10% a year, so mixing the two can make a mediocre fund look excellent.
In practice
Real-world examples.
Example
A company pension trustee compares two bond funds over three years. One shows a NAV return of 12% and the other 9%, so the trustee asks the lower-returning manager to explain the gap before renewing the mandate.
Example
A retail investor holds a closed-end fund that trades at a 10% discount to NAV. The fund's NAV return is 6% for the year, but she earned more because the discount narrowed and the share price rose faster than NAV.
Example
A finance manager at a university endowment notes that a fund's reported NAV return is after fees, and adds the sales charge she paid to estimate her own true return.
Formula
Calculation
NAV return (%) = (Ending NAV - Beginning NAV + Distributions per share) / Beginning NAV x 100
Worked example: a fund begins the year with a NAV per share of $20.00. By the end of the year the NAV per share is $21.00, and the fund paid distributions of $0.50 per share during the year.
Change in NAV = $21.00 - $20.00 = $1.00
Gain including distributions = $1.00 + $0.50 = $1.50
NAV return = $1.50 / $20.00 = 0.075, or 7.5%
By comparison, the change in NAV alone would be $1.00 / $20.00 = 5%, which understates the true performance by 2.5 percentage points.Case study
Seen in the real world.
Greystone Capital Partners is an illustrative, fictional asset manager that ran an income fund starting the year with a NAV of $10.00 per share. By December the NAV was $9.80, and the fund had paid $0.60 in distributions.
A marketing intern wrote on the fund page that the fund had lost 2% because the NAV had dropped from $10.00 to $9.80. The compliance officer corrected the claim, because the NAV return was ($9.80 - $10.00 + $0.60) / $10.00 = 4%, so investors had in fact gained.
In this illustrative story, the firm changed its fact sheet template to show NAV return as the headline figure. It also printed a footnote explaining that distributions are included so that readers would not misread the change in price.
Watch out
Common mistakes.
- Calculating return from the change in NAV alone and ignoring distributions paid during the period.
- Comparing the NAV return of funds over different periods, which makes the comparison meaningless.
- Assuming NAV return equals what an investor in an exchange-traded fund actually earned, when the market price may differ from NAV.
Questions
People also ask.
Does NAV return include fees?
Yes, because the fund's expenses are deducted from its assets before NAV is calculated, though sales charges paid by investors usually are not included.
How is NAV return different from total return?
They are very similar, and total return is often calculated on the NAV basis, while market total return is calculated on the market price basis.
Should I look at annualised or cumulative figures?
Both are useful, with annualised figures helping to compare funds over different time spans and cumulative figures showing the total gain over the full period.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related