Net Asset Value & Total Return – Clarifying Two Key Mutual Fund Data Points

Money IdeasIt has been my experience with many attendees at my investment education lectures that they do not have a clear understanding of two basic mutual fund concepts – net asset value (NAV) and total return (TR). While related, these two features of fund investing have two distinct functions – the former relates to the pricing of a fund’s shares and the latter to an indicator of a fund’s return to shareholders. What follows is an explanation of these fund features and what they mean to fund investors.

Net Asset Value (NAV)

Mutual fund shares are priced at their net asset value, commonly referred to as NAV, which represents a fund’s price per share for both buyers and sellers. This price is derived by dividing the total value of all of a fund’s securities in its portfolio, less any liabilities, such as the fund’s operating costs, by the number of fund shares outstanding. The NAV is computed once a day based on the closing market prices of the portfolio’s securities. This pricing methodology means that all buy and sell orders for a mutual fund’s shares are processed at the trade date’s NAV. However, because of this pricing methodology, investors, both buyers and sellers, must wait until the day following the trade day to get transaction prices.

Unlike stocks and bonds, whose prices are moved by market sentiment, fund prices, as mentioned above, are determined by the value of a fund’s total portfolio of securities, minus expenses. As we’ll discuss below in more detail, since mutual funds pay out (distribute) virtually all their income and realized capital gains, it is important that fund investors understand that NAV is relatively unimportant in gauging a fund’s performance, which is best judged by its total return (see below).

Mutual funds pay out interest and dividend income received from their portfolio holdings (stocks, bonds, and cash equivalent investments) as dividends, referred to as distributions, to fund shareholders. A fund will, hopefully, have both unrealized and realized capital gains. The former are capital gains on “paper,” i.e., they pertain to securities that have appreciated, but are still on the books in the fund’s portfolio. Capital gains become “realized,” when a fund sells a security with price appreciation, which then must be distributed. This capital gain is no longer in the portfolio.

Mutual funds are legally bound to pay out annually all their income, net of expenses, and realized capital gains to shareholders. Capital gain distributions are generally declared and paid out as lump sums close to a fund’s fiscal year-end. As an operational function of mutual funds, distributions, over time, tend to flatten out a fund’s NAV and minimize its contribution to a mutual fund’s total return.

Total Return

In the context of mutual fund investing, a fund’s performance is expressed as its total return, often indicated in data tables as TR. It is comprised of the changes in a fund’s price (net asset value), the income from dividends/interest and its distributions of capital gains. As explained above, fund investors need to understand that it is the latter two elements that are the principal drivers of a fund’s total return.

A fund’s total return is calculated periodically as an absolute percentage of its average assets. A fund’s total returns, expressed as an annual average percentage for periods of 1, 3, 5, 10, and 15 years, are of most interest to investors. A fund’s long-term results are the most convincing, e.g., a 10-year period is often the analytical standard.

For those investors interested in a mutual fund’s defensive qualities, I would advise them to look closely at a fund’s total returns in the down-market years of 2002 and 2008. How a fund manager was able to handle severe market declines is a good indicator of management quality. Protecting investors on the down-side is just as important as positive performance figures. In this regard, it is logical that years 2003 and 2009 are also important to determine a fund’s recovery powers.

Total return figures always need to be compared to an appropriate market benchmark index, as well as category and peer funds. Obviously, reasonable consistency of total returns that match or out perform these indicators is a positive fund investment quality.

Lastly, fund documents – prospectuses, statements of additional information and annual reports, as well as independent investment research reports such as Morningstar’s, will generally provide a “growth of $10,000” table. This metric shows, in easy to appreciate dollar amounts, how a $10,000 investment in a fund has performed over various periods.


A mutual fund’s obligation to distribute its income and realized capital gains on a yearly basis is the primary driver of total return. While a change in net asset value contributes to total return, its principal function is that of a pricing mechanism for the buying and selling of mutual fund shares. Among other measures of investment quality, a fund’s total returns, both absolute and comparative, are far more relevant as performance indicators than NAV.

Richard Loth is the founder and publisher of the Fund Investor’s Schoolhouse, a mutual fund investing educational platform for individual investors (

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