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 no-load funds typically perform relative to load funds?

    Understand the difference between no-load mutual funds and funds that carry a sales load, and learn which of the two has ...
  2. What are the most popular mutual funds that invest primarily in the insurance sector?

    Understand why investors may be interested in investment opportunities in the insurance sector, and learn which mutual funds ...
  3. How should I use portfolio turnover to evaluate a mutual fund?

    Learn about the turnover rate for mutual funds, and understand the effect higher turnover may have on fund performance and ...
  4. What are the risks involved in a banker's acceptance?

    Learn about the different kinds of college savings accounts, how they can benefit a college saver and how to open these savings ...
RELATED TERMS
  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  3. Historic Pricing

    A method for calculating the value of an asset using the last ...
  4. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  5. Ulcer Index - UI

    An indicator developed by Peter G. Martin and Byron B. McCann ...
  6. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation ...

You May Also Like

Related Articles
  1. Professionals

    5 Signs That You Have a Lousy 401(k) ...

  2. Professionals

    Target Date Funds: More Popular, Cheaper ...

  3. Mutual Funds & ETFs

    Pros & Cons Of Bond Funds Vs. Bond ETFs

  4. Mutual Funds & ETFs

    How Janus Capital Makes Money

  5. Professionals

    Mutual Funds: How Many is Too Many?

Trading Center