Section 4.4 — Mutual Fund Pricing & Expenses

  • Determining the Share Price (NAV)

  • Fund Liabilities (Expenses)

  • Expense Ratio

  • Pricing and Trading Mutual Funds

  • Closed-End Fund Comparison

  • Mutual Fund Settlement and Ownership

1. Determining the Share Price (NAV):

  • The price of a mutual fund share is called its Net Asset Value (NAV).

  • NAV represents the value of each share based on the fund’s portfolio.

  • Formula:
    NAV per share = (Total Assets − Total Liabilities) ÷ Shares Outstanding

  • NAV must be calculated at least once per day, usually after the close of major U.S. exchanges.

  • Mutual funds do not trade on secondary markets — all transactions go through the fund itself.

2. Fund Liabilities (Expenses):

  • Mutual fund liabilities include operating expenses such as:.

    • Manager’s Fees – Cost of hiring the investment adviser who makes day-to-day investment decisions.

    • Administrative Costs – Trading, legal, accounting, and transfer agent costs.

    • Board of Directors’ Fees – Compensation for board members’ oversight.

    • 12b-1 Fees – Marketing and distribution costs, such as advertising and trailing commissions to brokers.

3. Expense Ratio:

  • Expresses the annual cost of running the fund as a percentage of average net assets.

  • Formula:
    Expense Ratio = Fund’s Annual Operating Expenses ÷ Average Net Assets

  • Example: Expense ratio of 1.25% means $1.25 is deducted annually for every $100 in assets.

  • Typical range: Stock funds → 1%–1.5%

  • Does NOT include sales charges or loads — those are one-time costs, not ongoing.

4. Pricing and Trading Mutual Funds:

  • Mutual fund trades are executed using forward pricing — based on the next NAV calculated after the order is received.

  • Purchases are made at Public Offering Price (POP):

    NAV+Sales Charge (SC)=POP

  • Load funds: POP > NAV

  • No-load funds: POP = NAV

  • Sales charge limit: Cannot exceed 8.5% of POP

5. Closed-End Fund Comparison:

  • Closed-end funds do trade in the secondary market.

  • Their market price (POP) can be higher, lower, or equal to NAV.

  • If NAV > POP, it’s a closed-end fund (trades at a discount).

6. Mutual Fund Settlement and Ownership:

  • Trades settle the same day they are executed.

  • Buyers become owners of record the same day.

  • Sellers cease ownership on the day of redemption.

  • Dividends:

    • An investor can buy the fund and receive a dividend on the same day if they’re owners of record.

    • Ex-dividend date: One business day after the record date (set by the fund’s Board of Directors).

    • Declaration, record, and payment dates are also set by the Board.

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NAV

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NAV 〰️

✺ Review questions ✺

  • Net Asset Value — the per-share value of a mutual fund’s portfolio.

  • At least once daily, typically after major U.S. exchanges close.

  • (Total Assets − Total Liabilities) ÷ Shares Outstanding

  • Manager’s fees, administrative costs, board fees, and 12b-1 fees.

  • Annual Fund Expenses ÷ Average Net Assets

  • Load = POP > NAV (includes sales charge); No-load = POP = NAV.

  • 8.5% of POP

  • Mutual funds trade directly with the fund (primary market, once daily); closed-end funds trade on secondary markets.

  • Buyer becomes owner of record the same day of purchase; seller ceases ownership on day of redemption.

  • The day after the record date, set by the Board of Directors.