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Traditional vs. On-chain NAV Calculation

Explore the evolution of NAV calculation, from the traditional to on-chain methodology. Learn how tools like Fume enhance transparency, efficiency, and accuracy.
Pablo Pfister
9 min


In the context of investment funds, The Net Asset Value (NAV) is a single number that synthesizes the performance of the fund, defining the price at which the fund units can be subscribed to or redeemed. Its value is key for investors to make informed decisions, and as such, it needs to be calculated and reported in a meticulous way.

This article dives into how the NAV for open-ended investment funds is calculated. It covers both the traditional methodology and the benefits that using blockchain technology and the Fume software brings to it, enhancing transparency and correctness.

What is the NAV used for?

The NAV is the fundamental metric of an investment fund and is used for multiple purposes:

  1. Valuation of the investment: the NAV provides investors with a valuation of their investment in a fund. Multiplying the NAV by the number of shares owned, the total value of their investment is obtained;
  2. Distribution of income and capital gains: the NAV plays a role in determining the distribution of income and capital gains to fund investors. Funds often distribute dividends and capital gains to investors based on the NAV per share.
  3. Calculating the number of shares to issue to new investors;
  4. Calculating the amount due on redemptions;
  5. Calculating the fees due to the investment manager;
  6. Monitor the performance of the fund and its historical risk.

Understanding the NAV calculation

When subscribing capital to a fund the investor receives shares of the fund, i.e. fund units, and the NAV is simply the normalized value per share.

In open-ended funds it is usually calculated and reported on a regular basis, on a daily, weekly, monthly, quarterly, or yearly basis, giving the investor a snapshot of what each share is worth at a specific moment in time.

One single value to synthesize the whole situation of a potentially very complex investment strategy is quite a compression of information, so how is it calculated?

The NAV formula

The formula to compute the NAV is the fund's total gross asset value, divided by the number of shares outstanding.

NAV = Gross Asset Value / Number of Shares Outstanding

The formula in itself is simple, but a certain amount of complexity resides in its two components.

Gross Asset Value

The Gross Assets Value (GAV) of a fund is the difference between the total assets and the total liabilities held by the fund.

GAV = Total Assets - Total Liabilities

Mentioning assets and liabilities typically brings to mind a balance sheet. In fact, the action performed to compute the GAV is the establishment of detailed accounting and the consolidation in the traditional financial statements, where the total assets and the total liabilities can be found.

Different accounting standards can be used to consolidate the accounts, and the chosen one is often defined in the offering memorandum of the fund. For example, in Luxembourg, the accounting standard used is named Lux GAAP.

Shares Outstanding and Equalization

Keeping track of the total number of shares outstanding may appear simple but requires making adjustments to treat all investors fairly. Three distinct events lead to a variation in the number of shares in circulation:

When a New Investor Subscribes to the Fund

When a new investor desires to subscribe to the fund, new fund units need to be issued. The amount of fund units issued is calculated by dividing the subscribed capital minus the entry fees by the last NAV available. At the inception of the fund, when no prior NAV is available, a standard value is used (e.g. 100 or 1’000).

Number of new shares issued = (subscribed capital - entry fees) / NAV

The issuance of the new fund units is generally performed immediately after the calculation of the NAV and therefore requires the subscribed capital to already be available to the fund.

When an Existing Investor Redeems Shares

When an investor wishes to redeem its fund units, the capital to redeem is calculated by multiplying the NAV by the number of fund units minus the exit fee. Such units are then removed from the fund’s share registrar.

When the Fund Extracts a Performance Fee (Equalization)

The most complex case appears when the fund applies a performance fee with a high-water mark, and investors with different high-water marks are present.

When the fund incurs performance, it is essential that the performance fee extraction impacts all investors fairly.

A common solution is to perform an equalization before the calculation of the NAV. This is achieved by adjusting the number of shares of each investor that is above the high-water mark. The result can be obtained in two ways:

  1. increasing the number of shares of investors that need to be impacted less by the performance fee extraction; or
  2. decreasing the number of shares of investors that need to be impacted more.

The following procedure applies if option II. is chosen:

  1. Calculate the NAV without extracting the performance fee and name it NAV*.
  2. Remove from each investor the following amount of fund units:

shares * (1 - (NAV - (NAV* - HWM) * perf_fee_rate) / NAV*)

Where shares is the amount of shares the investor currently owns, HWM is the high-water mark of the investor, and perf_fee_rate is the percentage of the performance fee.

Rounding and approximation

The calculations described above involve multiplication and divisions between large numbers, inevitably generating values with a long number of decimal digits. Often, values are rounded to represent tangible values in the accounts, and in order to balance all accounts in an exact way, small liabilities in favor of investors are introduced.

Additional considerations

It is worth noticing that upon subscription the investor receives fund units of a specific unit class. A fund can have different unit classes (or share classes) for different portfolios or for different investment terms of the same portfolio. In such cases, multiple approaches are possible and commonly applied, namely, calculating different NAVs for different unit classes or equalizing the NAV for all unit classes.

Challenges in traditional NAV calculation

Traditionally, investment funds delegate to a fund administrator the central administration of the fund, including the NAV calculation and reporting. Even for a specialized service provider, the NAV calculation and reporting present multiple challenges, among which:

  1. Delays: the accounting process is often manually performed by central administrators handling many NAV calculations. This inevitably causes delays of several days between the end of the NAV period and the moment when the official value is ready to be published.
  2. Accounting mistakes: aggregating complex data from multiple sources to consolidate accounts, as well as assigning transactions to accounts often result in human mistakes that require multiple iterations of review. Errors in NAV calculation can have significant consequences for investors, leading to mispriced transactions or inaccurate performance reporting.
  3. Transparency and auditability: even for investment managers who delegate the NAV calculation to a central administration, the processes may lack transparency and auditability. It can be difficult for investors to verify the accuracy of NAV calculations or understand how NAV is derived from underlying asset values.

Addressing these challenges is crucial to improving the efficiency, accuracy, and transparency of NAV calculation and reporting in fund management. Emerging technologies like blockchain offer promising solutions to streamline these processes and enhance investor confidence in the integrity of NAV calculations, one such application is FUME.

On-chain NAV calculation and reporting

The core feature of blockchain and distributed ledger technology is the ability to immutably track transactions. This is used to track the ownership of assets on-chain (a.k.a. on the blockchain), starting from crypto assets, to real-world assets, and even complex financial instruments such as alternative investments, investment funds or OTC securities.

In other articles (Tokenized Funds vs. On-chain Fund), we covered the topic of fund tokenization, i.e. bringing the share registrar on-chain, but representing the shares on-chain might not be enough for a fund. Previous sections covered how the NAV calculation has a direct impact on the share registrar, making it essential to integrate it with tokenization.

Bringing the NAV on-chain means writing a smart contract that implements the NAV calculation alongside the tokenization. In doing so, the issuance of shares and the NAV history are precisely calculated and verifiable, leading to multiple benefits:

  1. Fast: where previously human work had to be performed to prepare spreadsheets and copy-paste values, now software performs the calculations in milliseconds;
  2. Economical: less manual work and the execution of simple software reduce costs drastically;
  3. Errorless: where previously manual work was the source of mistakes in calculations, now software calculates with precision and accuracy the values;
  4. Transparent & auditable: the nature of a smart contract makes it easy to verify that the correct calculation was performed, enabling anyone, from the investor to auditors, to verify the fund’s operations;
  5. Standardization: as more funds adopt this technology, standardized protocols can emerge, making it easier to integrate with other financial systems and technologies, further streamlining operations.

This model applies to a fund holding any type of asset both on- or off-chain, and requires the fund manager or the central administrator to provide the GAV.

It is worth noticing that further improvement in correctness, transparency and efficiency can be reached when all assets are held on-chain. In such a case, it is also possible to consolidate the GAV from on-chain data, making the process automated and fully verifiable.


The comparison between traditional and on-chain NAV calculations, by adopting Fume outlines a substantial shift towards a more efficient, precise, and transparent model. By harnessing the power of blockchain technology, Fume simplifies traditionally complex processes, offering significant improvements in speed and accuracy.

If you are intrigued by the potential of on-chain fund administration and wish to explore how it can benefit your operations, we invite you to get in touch to learn more. Our team is ready to assist you in setting up your own on-chain fund, guiding you through each step of the process to ensure a seamless and successful transition to the future of finance.

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