Can an open-ended fund's price appreciate significantly?

By Richard Loth AAA
A:

Theoretically, open-end mutual fund prices can experience a significant increase in price. However, three factors need to be considered to provide a practical answer to the question.

First, open-end mutual fund shares are priced at their net asset values (NAV), which are computed on a daily basis by dividing the total dollar amount of all the securities in a fund's portfolio, less any liabilities, by the number of fund shares outstanding after market close. In effect, it is the value of the underlying securities in a fund's portfolio that provides the basis for a mutual fund's pricing. Because fund shares are issued to (sold) and bought back (redeemed) from fund investors by the fund company, fund share prices are not subject to the buying and selling forces of the market, which tend to exert wider price swings than NAV pricing.

Second, most open-end mutual funds have portfolios that are quite diversified, which cushions the impact of dramatic price movements, positive or negative, in a portfolio's holdings. Over the short term, generally speaking, "significant" price increases are not typical of open-end fund shares.

Lastly, in view of the above, mutual fund stock and bond prices should experience less volatility than individual equity and fixed-income securities. Nevertheless, within the fund universe, certain categories of funds are subject to price movements that are greater than others because of the nature of their holdings and investment style. For example, Vanguard's large-cap value stock fund (U.S. Value Fund) recorded a five-year (2002-2006) NAV appreciation of 29%, while for a similar period, Century's small-cap growth stock fund (Small-Cap Growth Fund) had a 67% NAV appreciation.

It should be noted here that an open-end mutual fund's performance needs to be judged by its total return, both annually and over extended periods of time, and not its net asset value. Because funds must pay out their income and capital gains on an annual basis, fund investors look for benchmarks and assess whether peer funds are beating total returns, rather than net asset value performance.

RELATED FAQS

  1. What does the end of the quarter mean for portfolio management?

    Take a deeper look at why the end of a financial quarter, and all of its accompanying reports, is a significant event for ...
  2. What's the safest way to invest in high-yielding dividend stocks?

    Learn about some of the most important safety factors that you need to consider before you invest in high-yielding dividend ...
  3. What is the minimum amount of money that I can invest in a mutual fund?

    Learn about investing in mutual funds even with a smaller initial investment; there are many funds available to investors ...
  4. Why should I keep records on my tax-exempt bond transactions?

    Keep your purchase records on all investments, including tax-exempt bonds. Though the interest is tax-free, you may owe taxes ...
RELATED TERMS
  1. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  2. Account Minimum

    The minimum balance required to be maintained in an investment ...
  3. Capital Growth

    The increase in value of an asset or investment over time. It ...
  4. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  5. Historic Pricing

    A method for calculating the value of an asset using the last ...
  6. Variable Annuitization

    An annuity option in which the amount of income payments received ...

You May Also Like

Related Articles
  1. Investing Basics

    Putting Your Retirement Eggs in Several ...

  2. Economics

    Profiting From China's Breakout: The ...

  3. Pimco has stabilized its Total Return fund, but its returns are still shaky and its sales load is still a fat one.
    Professionals

    A Look At Pimco's Total Return Fund ...

  4. 10 equity mutual funds bargains for any investor or financial advisor.
    Professionals

    10 Equity Mutual Fund Bargains

  5. Investing Basics

    Online Portfolio Management, DIY or ...

Trading Center