Lesson 4.4: Net Asset Value and Forward Pricing

Calculating Net Asset Value

• The value of a mutual fund's shares will fluctuate along with the value of the securities in the fund's portfolio.

• Mutual funds don't trade in the secondary market, so the value of shares is not determined by supply and demand but rather by formula

To calculate the NAV of a fund share

total assets – total liabilities = net assets of the fund

net assets of the fund / shares outstanding = NAV per share

To calculate the NAV of a fund share

(total assets – total liabilities) / outstanding shares = NAV per share

how often is NAV per share calculated

at least once per day after the close of trading on the major U.S. exchanges

Liabilities and the Expense Ratio

the liabilities of a mutual fund are made up of several expenses that the fund pays to maintain its operation.

List of the expenses you may see on the exam:

• Manager's fee. This is the cost of the investment adviser that makes the day-to-day investment decisions for the fund's portfolio.

• Administrative costs. This includes trading costs, legal and accounting costs, transfer agent costs, and other administrative expenses.

• Board of director's costs. The board members are paid for their time, plus meeting costs, report preparation, and costs associated with the support of the board.

• 12b-1 fees. These fees are used to pay for certain costs of distribution. 12b-1 fees are often used for advertising and paying trailing commissions to broker-dealers.

• Costs to maintain shareholder records, costs to provide services to shareholders

The annual cost of the expenses is expressed in the fund's

expense ratio

How is the expense ratio is calculated

dividing a fund's expenses for a year by its average net assets for that same year.

The expense ratio does not include

sales charges or loads. Those costs are charged one time, and are not ongoing.

Forward Pricing rule

• The transaction price is based on the next time NAV is calculated going forward.

• Most funds calculate NAV once per day following the close of trading, so most mutual fund transactions are processed once a day following that calculation.

Public Offering Price

a share is purchased at NAV plus a sales charge = public offering price (POP)

NAV + SC = POP

sales charge for a mutual fund

percentage / POP = SC

ABC Growth Fund has a NAV of $11.40, a POP of $12.00, and pays a dividend of $0.15. What is the sales charge for this mutual fund?

5%

The formula is NAV + SC = POP. The difference between NAV and POP in this question is 60 cents but recall that SC is always expressed as a percentage of POP. $0.60 / $12.00 is 0.05, or 5%.

Public Offering Price

• On a load fund, the POP will always exceed the NAV.

• On a no-load fund, NAV will be equal to POP.

• The sales charge is defined as a percentage of the POP.

• The sales charge may not exceed 8.5% of the POP.

• For a closed-end fund trading in the secondary market, the NAV may be higher, lower, or equal to the POP.

  • If you see a question where the NAV is higher than the POP, that is a closed-end fund.

Mutual fund divided dates

• Declaration date

• Record date and payable date

• Ex dividend date: is typically the business day after the record date.