In a world of constant updates and instantly available data, the static nature of mutual fund share prices can be disconcerting. The daily pricing convention of mutual fund shares means that you will not know the actual price when you buy or sell until the next day. The way mutual fund shares are priced is a clue as to why mutual funds are buy-and-hold investments If you are planning on some short-term trading, you need to look at exchange traded funds -- ETFs.
Mutual Fund NAV
The official term for a mutual fund's share price is net asset value -- NAV. Funds calculate NAV by adding up the market value of all of the securities held and dividing by the number of shares owned by fund investors. Since all transactions to buy or sell fund shares are handled by the mutual fund company, investor purchases and redemptions will be based on the NAV plus any sales charge for purchases or minus any redemption fees for fund sales.
Mutual funds calculate the NAV after the stock and/or bond markets close each day at about 4 p.m. Eastern time. The closing value of the fund's stock or bond positions are used to calculate the fund share price. As a result, mutual fund share prices are set once a day -- Monday through Friday -- and are based on the daily closing prices in the stock and bond markets. After a fund has calculated the daily NAV, the result is transmitted to the financial news organizations, which publishes NAV as the current share price.
Buying and Selling
During the business day, the mutual fund company takes in all of the orders to buy and redeem shares and holds them until the NAV is calculated after the markets close. The orders can then be finalized. Depending on how quickly the mutual fund company posts results to individual accounts, you may not know until the next day the actual values of your buy and sell orders. You can look up the NAV in the evening and do your own calculations.
NAV in the Markets
Other fund types, such as closed-end funds and ETFs, also calculate a daily NAV. The difference is that their shares trade on the stock exchanges. You buy and sell shares of closed-end funds and ETFs at the market price -- instead of the NAV -- through your brokerage account. The share price quoted on the stock exchange for one of these securities can be quite different from the NAV calculated at the end of the day.
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