A:

Intuition tells us that a mutual fund's net asset value (NAV) (the net value of all assets within the mutual fund's portfolio divided by the number of outstanding shares) should be identical to its market price, but often, the market price of a closed-end mutual fund (a fund with a fixed number of issued shares that can't be altered) will trade either above or below its NAV. When this situation occurs and the fund is trading above this price, it is said to be trading at a premium; conversely, when the fund is trading below this price, it is said to be trading at a discount.

Here are some possible reasons for why these funds trade at premiums or discounts:


and - the fundamentals of supply and demand will adjust the trading price of a mutual fund compared to its NAV. If the fund is in high demand and low supply, the market price will typically exceed the NAV. If there is low demand and much supply, the market price will usually be lower than the NAV.

- Another reason why there may be a price deviation between the NAV and market price is the management team responsible for the fund itself. Sometimes, if the manager is highly regarded, a premium will be paid by investors wishing to hold the fund. If the management is not as highly regarded, the fund may trade at a discount.

Expectation - Similar to a stock, the expectation that a mutual fund's will perform well may affect whether the market price is above or below the NAV. Portfolios with expected to perform well in the near future will demand a premium to NAV, while those with assets expected to perform poorly may sell at a discount.

For more on this topic, please see our .

RELATED FAQS
  1. How do you find out the price of a mutual fund?

    The easiest way to find out the price of a mutual fund is to look at its net asset value (NAV). NAV is the total value of ... Read Answer >>
  2. How often are mutual fund prices updated?

    Learn how often mutual funds must report their price, or net asset value, which is daily for open-ended registered investment ... Read Answer >>
  3. What is a mutual fund's NAV?

    Net asset value (NAV) represents a fund's per share market value. This is the price at which investors buy ("bid price") ... Read Answer >>
  4. You currently own a mutual fund with a Net Asset Value (NAV) of $11.25 ...

    The correct answer is d In mutual funds, the NAV is the total value of the fund's portfolio less liabilities. The NAV is ... Read Answer >>
  5. Why is it that when investors realize returns on a mutual fund, its price tends to ...

    Mutual funds have been in existence since 1924, when the first open-ended mutual fund was created. Since then, the market ... Read Answer >>
  6. How is NAV used for oil, gas, and energy investments?

    Find out how net asset value, or NAV, can be useful for evaluating mutual funds with oil, gas and energy investments or valuing ... Read Answer >>
Related Articles
  1. Professionals

    Net Asset Value

    CFA Level 1 - Net Asset Value. Describes the calculations behind net asset value for open and closed-end funds. Reveals why differences between share price and NAV exist.
  2. Professionals

    Mutual Fund Marketing and Pricing

    Mutual Fund Marketing Mutual fund shares are marketed according to the rules established by the Investment Company Act of 1940. Any mutual fund advertisement containing performance data ...
  3. Mutual Funds & ETFs

    Net Asset Value (NAV)

    Net Asset Value (NAV)
  4. Mutual Funds & ETFs

    Open-Ended And Closed-End Funds

    Open-Ended And Closed-End Funds
  5. Mutual Funds & ETFs

    An Introduction To Closed-End Mutual Funds

    If you're looking to generate income for your investments, look no further.
  6. Mutual Funds

    What mutual funds are: Professionally managed pools of stocks, bonds and/or other instruments that are divided into shares and sold to investors. Pros: Diversification; liquidity; simplicity; ...
  7. Professionals

    Mutual Funds

    NASAA Series 65: Section 9 Mutual Funds. In this section Unit Investment Trusts, UITs, Face-amount certificates and Closed-end and Open-end Management Companies.
  8. Mutual Funds & ETFs

    How to Calculate the Value of an ETF

    An ETF is a good way to get broad exposure without taking on specific risk, but calculating performance may be a bit tricky.
  9. Mutual Funds & ETFs

    Understanding Mutual Fund Returns

    By Richard Loth (Contact | Biography)The return on any investment, measured over a given period of time, is simply the sum of its capital appreciation and any income generated divided by the ...
  10. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Mutual Funds

    What they are: A professionally managed pool of stocks, bonds and/or other instruments that is divided into shares and sold to investors. Pros: Diversification; liquidity; simplicity; ...
RELATED TERMS
  1. Net Asset Value - NAV

    A mutual fund's price per share or exchange-traded fund's (ETF) ...
  2. NAV Return

    The change in the net asset value of an exchange-traded fund ...
  3. Forward Pricing

    A Securities and Exchange Commission regulation that requires ...
  4. Indicative Net Asset Value - iNAV

    A measure of the intraday net asset value (NAV) of an investment, ...
  5. Discount To Net Asset Value

    A pricing situation that occurs with a closed-end mutual fund ...
  6. Premium To Net Asset Value

    A pricing situation that occurs when the stock value of a closed-end ...

You May Also Like

Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  4. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  5. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center