Investment Companies - Mutual Fund Pricing

Investors must always pay the full price when buying mutual fund shares. The full price represents the net asset value plus a sales charge (if applicable). This is called the public offering price (POP).

Net Asset Value (NAV)
NAV is determined by dividing the net assets of the fund by the total number of outstanding shares. The NAV must be computed at least once a day. The NAV is calculated at the end of trading on the New York Stock Exchange; orders to buy and sell the fund are based on the price to be computed at that time, so if an investor buys shares of the fund at 10:30am, the price paid will not be known until after the close of trading on that day.

To calculate the NAV of a mutual fund, remember the following formula:

NAV = Assets - Liabilities
Number of outstanding shares

Sales Charges
To pay for management and distribution costs and other administrative liabilities, open-end management companies charge fees to investors when they buy shares of mutual funds.

  • Front-End Load: When investors buy shares of a mutual fund, they usually pay a front-end load, which is simply the NAV plus a sales fee. The mutual fund's sales fee is stated as a percentage of thepublic offering price (POP). The maximum front-end sales charge is 8.5% for funds that do not charge 12b-1 fees. The maximum sales charge is reduced for the following funds:

    • 7.25% for funds that do charge 12b-1 fees
    • 7.25% for funds that do not permit dividend reinvestment at net asset value
    • 8.0% for funds that do not permit rights of accumulation for the breakpoints shown in the section below
    • 6.75% for funds that do not permit both dividend reinvestment at net asset value and rights of accumulation breakpoints.

The sales fee percentage is computed by subtracting the NAV from the POP and dividing the total by the POP:

Sales charge = POP-NAV
Offering price POP

For instance, a mutual fund is quoted in The Wall Street Journal as 22.34-24.13. The POP will be the higher of the two numbers, so the lower number is the NAV. Using the formula above, we can calculate the sales charge as a percentage of the offering price:

24.13 - 22.34 = 1.08 = 4.48%
24.13 24.13

  • Back-End Loads and Contingent Deferred Sales Charges: An investor can buy a mutual fund at the NAV in certain instances. When the fund is redeemed, the management company imposes a sales charge depending on how long the investor has held the shares. The amount of this back-end load decreases the longer the investor owns the shares. As long as the investor holds on to the shares beyond the time period during which a contingent deferred sales charge (CDSC) is applicable, no sales charge will be enforced, and the fund will effectively operate as if the investor had originally purchased the shares with a front-end load.

The following is an example of how a CDSC scale might work:

Years owning fund CDSC as a % of amount invested
0-1 5%
1-2 4%
3-4 3%
4-5 3%
5-6 2%
6-7 1%
7 or more 0%

In this example, if the fund holder owns shares for more than seven years, no charge is applied by the management company when the shares are redeemed. Shares held the longest are redeemed first. The charge is calculated on either the original value of the shares or the current NAV, whichever is less.

12b-1 Fees
Under Section 12b-1 of the Investment Company Act of 1940, the Securities and Exchange Commission allows fund management companies to impose a charge on fund assets to pay for distribution costs, including advertising and commissions, if certain conditions are met, including:

  • The 12b-1 plan was originally approved and is annually approved by a majority shareholder vote, as well as the board of directors.
  • Payments made by the mutual fund for distribution are in compliance with the written plan so approved.
  • The 12b-1 plan may be terminated without penalties at any time.

These imposed costs are called 12b-1 fees. In the following discussion of classes of shares, you'll see how these fees differ in amount depending on the share class. Unlike sales charges, 12b-1 fees are deducted from the fund asset value every year, either as a flat fee or as a percentage of the fund's average total NAV during the year.

Customers who buy shares of mutual funds with high 12b-1 fees will usually wind up paying more in sales charges than if they had originally bought shares with a front-end load. Conversely, those investors who are looking for short-term returns will usually benefit from buying one of the non-front-end loaded funds.

No-load funds are mutual funds that are sold at their NAV, without any sales charge added. In other words, the NAV and the ask price are the same. Investors in no-load funds usually buy shares directly from the fund management company.

Classes of Fund Shares
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