As previously discussed, the shares of closed-end funds trade on an exchange, and the market will determine their prices, but the prices for shares of mutual funds are based on NAV.

Say, for example, you just established a balanced fund and today you issue your first shares to the public. You have published a prospectus stating that you are starting with $100,000,000 in cash. Your starting NAV is easy enough to determine: $100,000,000.

But tomorrow it will be harder to compute because of two complications:

  1. First, you will have invested your cash in stocks, bonds and money-market instruments, and you will have to deal with their changes in market price as well as accrual of interest and dividends.

  2. Second, you will have issued shares, let's say 1,000,000 of them - and the important number is not NAV itself, but NAV per share, or NAVPS.

Here's how you calculate NAVPS:

  1. Take the market value of all the assets in the fund. In this example, let's assume the market had a very good day, and the assets you bought in the morning appreciated an average of 3% by end of trading. Your assets would be valued at $103,000,000.

  2. Subtract liabilities. Assume it costs a fixed $1,000,000 to advise and manage the fund for the year, and there is a contract in place making this a formal liability. Your NAV, then, would be $102,000,000.

  3. Divide the NAV from step 2 by the number of shares issued. In this case, you issued 1,000,000 shares, so your NAV is $102 ($102,000,000 divided by 1,000,000 shares).

Bid vs. Offering Prices
NAV per share is considered the share's bid price, or the price the fund actually receives when it sells a share, and it must be calculated daily. The bid price is different from the offering price. Let's say that, between the selling group members and the underwriter, the sales charges come in at 8%. Remember, that is not 8% of the bid price, it is 8% of the offering price. You cannot get to the offering price by adding the sales charge.

Here's how you calculate the offering price:

  1. Take the sales charge percentage and subtract it from 1. In the case of an 8% sales charge, the result is 0.92 (1.0 minus 0.08).

  2. Take the bid price and divide it by the result of step 1 to get the offering price. In this example in which the NAV per share is $102, the final result is $110.87 ($102 divided by 0.92).


Look Out!
If you simply tacked 8% onto $102, your result would be $110.16, and that would be wrong. You can bet the Series 7 exam will have at least one trick answer like that.


The NAV-based formula for computing the public offering price must be included in the mutual fund's prospectus, which must be updated at least every 16 months.



Dollar Cost Averaging

Related Articles
  1. 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.
  2. Investing

    Investing $100 a Month in Stocks for 20 Years

    Learn how a monthly investment of just $100 can help build a future nest egg using properly diversified stocks or stock mutual funds.
  3. Investing

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
  4. Financial Advisor

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  5. Financial Advisor

    Finding the Right Mutual Fund: Top Tips

    Here's how to find the right mutual fund using five considerations to narrow down your choices.
  6. Investing

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
  7. Investing

    Understanding Rights Issues

    Not sure what to do if a company invites you to buy more shares at discount? Here are some of your options.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center