How does NAV return differ from market return?

NAV Return vs Market Return: Understanding the Differences

When it comes to investment returns, there are two key terms that investors need to be familiar with: NAV return andmarket return. While both are important metrics for evaluating the performance of an investment, they have different meanings and implications. In this article, we will explore the differences between NAV return and market return, and how investors can use these metrics to make informed investment decisions.

What is NAV Return?

NAV (Net Asset Value) is the value of a mutual fund or exchange-traded fund (ETF) calculated by subtracting the fund's liabilities from its assets. NAV is calculated on a per-share basis and is used to determine the price of shares for buying or selling. NAV return is the percentage change in the NAV of a fund over a specific period of time, usually one day, one week, one month, one quarter, or one year.

NAV return reflects the performance of theunderlying assetsheld by the fund, including stocks, bonds, and other securities. The NAV return of a fund can be positive or negative, depending on the performance of its holdings. For example, if a fund has a NAV of $10 at the beginning of the year and a NAV of $12 at the end of the year, its NAV return is 20%.

What is Market Return?

Market return, also known as total return, is the percentage change in the price of an investment over a specific period of time, including any dividends or interest paid out during that time. Market return reflects the performance of the investment in thebroader market, rather than just the performance of the underlying assets held by a particular fund.

Market return can be positive or negative, depending on the performance of the investment and the broader market. For example, if an investment has a price of $100 at the beginning of the year and a price of $120 at the end of the year, and it pays out $2 in dividends during the year, its market return is 22%.

How do NAV Return and Market Return Differ?

The key difference between NAV return and market return is the scope of the performance they reflect. NAV return reflects the performance of the underlying assets held by a particular fund, while market return reflects the performance of the investment in the broader market. As such, NAV return is a more specific metric that can give investors an idea of how well a fund is performing in relation to its benchmark, while market return can give investors an idea of how well an investment is performing in the broader market.

Another difference between NAV return and market return is the timing of the calculation. NAV return is calculated on a daily, weekly, monthly, quarterly, or annual basis, while market return is calculated over a specific period of time, such as a year or several years. As such, NAV return can give investors a more up-to-date picture of the performance of a fund, while market return can give investors a longer-term perspective on how an investment has performed over time.

How to Use NAV Return and Market Return in Investment Decisions

Both NAV return and market return can be useful metrics for evaluating the performance of an investment, but they should be used in conjunction with other factors, such as the investment's risk profile, fees, and management history. Investors should also consider their own investment goals and risk tolerance when making investment decisions.

For example, if an investor is looking for a fund that closely tracks a particular benchmark, such as the S&P 500, they may want to focus on the NAV return of different funds to find the one that closely matches their desired benchmark. On the other hand, if an investor is looking for an investment that has performed well over a longer period of time, they may want to focus on the market return of different investments to find the ones that have consistently outperformed the broader market.

Conclusion

In summary, NAV return and market return are two important metrics for evaluating the performance of an investment. NAV return reflects the performance of the underlying assets held by a particular fund, while market return reflects the performance of an investment in the broader market. While both metrics can be useful for making investment decisions, investors should consider other factors as well, such as risk, fees, and management history, to make informed investment decisions that align with their investment goals and risk tolerance.