Money Market Funds, Mutual Funds, Net Asset Value

The share price of mutual funds is based on their net asset value.  Shares of mutual funds are bought and sold at the fund’s net asset value.  The price that investors pay to purchase mutual fund is the approximate per share NAV, plus any fees that the fund imposes at purchase, such as sales loads or purchase fees.  The price that investors receive on redemptions is the approximate per share NAV at redemption, minus any fees that the fund deducts at that time such as deferred sales loads or redemption fees.  The shares of money market funds are based on the same pricing of net asset value. 

Net asset value, or NAV, of a mutual fund is the company’s total assets minus its total liabilities.  A fund’s NAV is calculated by subtracting the fund’s liabilities from its assets, and dividing by the number of shares of the fund.  As an example, a fund with $125 million securities and other assets and $15 million in liabilities the investment company’s NAV will be $110 million, this is not the per share NAV.  An investment company calculates the NAV of a single share by dividing its total NAV by the number of shares that are outstanding.  If in the above example, there are 10 million shares outstanding, the fund has a NAV of $11.  Given that a mutual fund company’s assets and liabilities change daily, NAV will also change daily.  NAV, for most mutual funds will always move up and down in value, they might be $90 million one day, $100 million the next, and $80 million the day after.  An investor may determine the value of their pro rata share of the mutual fund by multiplying the number of shares held by the fund’s NAV.

Because per share NAV is based on NAV, which changes daily, and on the number of shares held by investors, which also changes daily, per share NAV also will change daily.  Most mutual funds publish their per share NAVs in the daily newspapers.  The NAV must reflect the current value of the fund’s securities.  The value of these securities is determined either by a market quotation for those securities in which a market quotation is readily available, or if a market quotation is not readily available, at fair value as determined in good faith and the applicable accounting regulation for the fund.  Money market funds generally maintain a net asset value per share of $1.00 since the underlying securities the funds invest in tend not to change in value.

Mutual fund investors are able to redeem mutual fund shares each business day.  Federal law requires that a fund’s NAV be calculated each trading day.  The NAV must be calculated in order that these transactions can take place with timely, reliable and accurate pricing.  Mutual funds and generally must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.  Most funds price their securities at 4 pm Eastern time, when the New York Stock Exchange closes.  A mutual fund typically obtains the prices for securities it holds from a market data vendor, which is a company that collects prices on a wide variety of securities.  Fund accounting agents internally validate the prices received from a vendor by subjecting them to various control procedures.  In many instances, funds may use more than one pricing service either to ensure accuracy or to receive prices for a wide variety of securities held in its portfolio, whether they are stocks or bonds.

The vast majority of mutual funds submit their daily NAVs to NASDAQ by 6 pm Eastern time so they may be published in the next day’s morning newspapers.  As NASDAQ receives prices, they are instantaneously transmitted to newswire services and other subscribers. Daily fund prices are available in newspapers and other sources, such as through a fund’s toll-free telephone service or website.  The 1940 Act requires forward pricing for shareholder transactions, meaning that shareholders who purchase or redeem shares must receive the next computed share price, NAV, following the fund’s receipt of the transaction order.  Under forward pricing, orders received prior to 4 pm receive the price determined that same day at 4 pm; orders received after 4 pm receive the price determined at 4 pm on the next business day.

Most mutual funds also continually offer new shares to investors.  Many fund companies also allow shareholders to transfer money, or make exchanges, from one fund to another within the same fund family.  Mutual funds process investors’ sales, redemptions, and exchanges as a normal part of daily business activity and must ensure that all transactions receive the appropriate price.

For the statutory and regulatory provisions relating to NAV, refer to the Investment Company Act of 1940 and the rules adopted under that Act, in particular Section 2(a)(41), and Rules 2a-4 and 22c-1.

This entry was posted on Tuesday, January 6th, 2009 at 3:35 pm and is filed under Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.