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 .

  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. How do dividends affect net asset value (NAV) in mutual funds?

    Understand how dividends affect the net asset value of mutual fund shares, and how this fits into the calculation of a mutual ... Read Answer >>
  5. How often should I be checking the NAV of my mutual fund shares?

    Learn why the net asset value (NAV) of a mutual fund should be monitored regularly and understand the reasons why you should ... Read Answer >>
Related Articles
  1. Investing

    An Introduction To Closed-End Mutual Funds

    If you're looking to generate income for your investments, look no further.
  2. Financial Advisor

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  3. Investing

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  4. Investing

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  5. Investing

    Open Your Eyes To Closed-End Funds

    Although less popular than their open-ended counterparts, these investment vehicles are worth a second look.
  6. Investing

    Closed-End Vs. Open-End Funds

    Open-end products may be a safer choice than closed-end, but closed-end funds might produce a better return.
  7. Investing

    Mutual Fund Or ETF: Which Is Right For You?

    Learn the differences between these investment products and how to take full advantage.
  8. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  1. Net Asset Value - NAV

    A mutual fund's price per share or exchange-traded fund's (ETF) ...
  2. Premium To Net Asset Value

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

    A Securities and Exchange Commission regulation that requires ...
  4. Discount To Net Asset Value

    A pricing situation that occurs with a closed-end mutual fund ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  6. Open-End Fund

    A type of mutual fund that does not have restrictions on the ...
Hot Definitions
  1. Nest Egg

    A substantial sum of money that has been saved or invested for a specific purpose. A nest egg is generally earmarked for ...
  2. Denial Of Service Attack (DoS)

    An intentional cyberattack carried out on networks, websites and online resources in order to restrict access to its legitimate ...
  3. Perkins Loan

    A loan program that provides low-interest student loans to undergraduate and graduate students who demonstrate exceptional ...
  4. Wealth Management

    A high-level professional service that combines financial/investment advice, accounting/tax services, retirement planning ...
  5. Assets Under Management - AUM

    The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked ...
  6. Subprime Auto Loan

    A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official ...
Trading Center