How To Master Mutual Fund Pricing
How to Value Mutual Fund Shares
Mutual funds must determine the net asset value of the fund’s shares at least once per business day. Most mutual funds will price their shares at the close of business of the NYSE (4 p.m. EST). The mutual fund prospectus will provide the best answer as to when the fund calculates the price of its shares. The calculation is required to determine both the redemption price (NAV) and the purchase price (POP) of the fund’s shares. The price that is received by an investor who is redeeming shares and the price that is paid by an investor who is purchasing shares will be based on the price that is next calculated after the fund has received the investor’s order. This is known as forward pricing. To calculate the fund’s NAV use the following formula:
assets – liabilities = net asset value
To determine the NAV per share simply divide the total net asset value by the total number of outstanding shares.
total # of shares
If XYZ mutual fund has $10,000,000 in assets and $500,000 in liabilities, what is the fund’s NAV?
assets – liabilities = NAV
$10,000,000 – $500,000 = $9,500,000
If XYZ has 1,000,000 shares outstanding, its NAV per share would be:
total NAV $9,500,000
total # of shares 1,000,000
NAV per share = $9.50
Changes in the NAV
The net asset value of a mutual fund is constantly changing as security prices fluctuate and as the mutual fund conducts its business. The following illustrates how the NAV per share will be affected given certain events.
Increases in the NAV
The net asset value of the mutual fund will increase if:
- The value of the securities in the portfolio increase
- The portfolio receives investment income, such as interest payments from bonds
Decreases in the NAV
The net asset value will decrease if:
- The value of the securities in the portfolio fall
- The fund distributes dividends or capital gains
No Effect on the NAV
The following will have no effect on the net asset value of the mutual fund share:
- Investor purchases and redemptions
- Portfolio purchases and sales of securities
- Sales charges
The maximum allowable sales charge that an open-end fund may charge is 81/2% of the POP. The sales charge that may be assessed by a particular fund will be detailed in the fund’s prospectus. It is important to note that the sales charge is not an expense of the fund; it is a cost of distribution, which is borne by the investor. The sales charges pay for all of the following:
- Underwriters’ commission
- Commission to brokerage firms and Registered Representatives
Closed-end funds do not charge a sales charge to invest. An investor who wants to purchase a closed-end fund will pay the current market price plus whatever their brokerage firm charges them to execute the order.
A front-end load is a sales charge that the investor pays when they purchase shares. The sales charge is added to the NAV of the fund and the investor purchases the shares at the POP. The sales charge, in essence, is deducted from the gross amount invested and the remaining amount is invested in the portfolio at the NAV. Shares that charge a front-end load are known as “A” shares.
XYZ mutual fund has a NAV of $9.50, a POP of $10, and a sales charge percentage of 5%. How much sales charges would an investor pay if they were to invest $10,000 in the fund?
$500 = sales charge
$9,500 invested in the portfolio at NAV
A back-end load is also known as a contingent deferred sales charge (CDSC). An investor in a fund that charges a back-end load will pay the sales charge at the time of redemption of the fund shares. The sales charge will be assessed on the value of the shares that have been redeemed and the amount of the sales charge will decline as the holding period for the investor increases. The following is a hypothetical back-end load schedule:
|Years Money Left in Portfolio1
5 years or more
The mutual fund prospectus will detail the particular schedule for back-end load sales charges. Mutual fund shares that charge a back-end load are also known as “B” shares.
Other Types of Sales Charges
There are other ways in which a mutual fund assesses a sales charge. Shares that charge a level load based on the NAV are known as level-load funds, or “C” shares. Shares that charge an asset-based fee and a back-end load are known as “D” shares.