Net asset value (NAV)is significant only for open-end mutual funds. It is a simple calculation - just take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. Thus, if a fund has total net assets of $50 million and there are one million shares of the fund, then the NAV is $50 per share. (Fund liabilities include items such as fees owed to investment managers.)
For closed-end funds, share value is determined in the secondary markets (the formal exchanges) where the shares are traded. The NAV of a closed-end fund is the price per share multiplied by the total number of shares. Obviously, the value of a closed-end mutual fund changes continuously throughout the trading day.
For open-end mutual funds, NAV is a useful determinant for tracing share price movements. However, it is not useful for evaluating overall fund performance. This is because mutual funds are required by law to distribute at least 90% of their realized capital gains and dividend income to investors each year. When a fund pays investors the required distribution, its NAV is reduced by the amount of the distribution. Investors tracking only NAV may become concerned about the drop but in fact, the net value of their investment is unchanged; the reduction in NAV is offset by the amount of distribution they have been paid.
The most important thing to keep in mind is that NAVs change daily and are not a good indicator of actual performance because of the impact yearly distributions have on NAV (it also makes mutual funds hard to track).
The NAV is usually below the market price because the current value of the fund's assets is higher than the historical financial statements used in the NAV calculation.