Fund Accounting and NAV

Every fund needs to know what it is worth so investors can buy in and sell out at a fair price. Net asset value (NAV) is that number: the fund's total assets minus its liabilities, usually expressed per share or unit. Mutual funds calculate NAV daily, typically at the market close, and all orders received that day trade at that price. Hedge funds usually calculate it monthly. Fund accountants, often at an independent administrator, perform this calculation, and getting it right is essential for fairness and trust.

The NAV formula#

NAV per share = (Total assets - Total liabilities) / Shares outstanding

Valuation and pricing#

When markets close before the fund's NAV time, funds may apply fair value adjustments so that investors cannot exploit stale prices. Fair valuing illiquid assets involves judgement, which is why independent administrators, auditors and valuation policies matter. See Liquidity Risk.

Accruals and fees#

Funds accrue income and expenses daily rather than waiting until payments occur. Management fees, for example, are accrued each day as a fraction of the annual rate, so the NAV already reflects them. Hedge funds also accrue performance fees, sometimes using equalisation methods so investors who join at different times pay fees fairly. See Hedge Funds.

ETFs and NAV#

ETFs publish a NAV daily but also trade all day on exchanges at market prices. Authorised participants create and redeem ETF shares in large blocks, which keeps market prices close to NAV. During stress, ETF prices can move away from NAV, especially for funds holding less liquid assets such as some bonds. See What Is an ETF?.

Who does fund accounting#

Independent administration became more common after cases where managers inflated their own valuations. Bernard Madoff's fraud, uncovered in 2008, relied on a lack of independent custody and verification. See Operational and Model Risk.

NAV errors#

Errors can arise from wrong prices, missed corporate actions, incorrect accruals or trade booking mistakes. Funds have policies requiring correction and investor compensation when errors exceed set thresholds. Reconciliation of positions and cash with custodians is the main control. See Trade Accounting and Reconciliation.

Frequently asked questions#

What is NAV?#

Net asset value, the total value of a fund's assets minus its liabilities, usually expressed per share.

When is mutual fund NAV calculated?#

Typically once a day after the market close, and all orders received before the cutoff trade at that day's NAV.

Why can ETF prices differ from NAV?#

ETFs trade continuously at market prices; supply, demand and liquidity of the underlying assets can create small premiums or discounts to NAV.

Next, learn how funds report to their investors in Investor Reporting.