N is for Net-Asset Value

When you buy or sell shares of a mutual fund, their price is the fund’s net-asset value (or NAV, for short). The NAV is calculated by totaling up the value of all the mutual fund’s securities at the end of the trading day and dividing that value by the number of shares outstanding.  As the NAV rises and falls each day, you are gaining or losing value.

Mutual funds pay dividends, which almost always are reinvested in additional shares within the fund.  The NAV will be reduced by the amount of the dividend.  This doesn’t mean you lost money.  You now own more shares of the fund at a lower value.  Before the dividend was paid, you owned fewer shares of the fund at a higher price.  The math works out such that the value of your ownership in the fund is the same before and after the dividend payment. The lesson here?  Don’t track the performance of your investment by its share price.  Look at the total value of your shares.