A mutual fund's price, or its net asset value (NAV), is determined once a day after the stock markets close at 4 p.m. Eastern Standard Time (EST) in the United States. While there is no specific deadline when a mutual fund must update and submit its NAVs to regulatory organizations and the media, they typically determine their NAVs between 4 p.m. and 6 p.m. EST.
Mutual and Closed-End Funds
A mutual fund represents a pool of funds invested in various securities traded on the equities exchanges. Mutual funds are typically registered with the Securities and Exchange Commission (SEC) as open-end investment companies and must report their NAVs every trading day. Open-end mutual funds can issue any number of shares that can be purchased by any number of investors.
In contrast, closed-end funds, whose shares are not redeemable and are issued at a fixed amount, are exempt from the requirement to report their NAVs daily. For open-end funds, NAVs change with portfolio value changes and also with the number of shares outstanding. For closed-end funds, NAVs change only with fluctuations in the value of the portfolio.
Net Asset Value Calculations
While a stock's price fluctuates significantly throughout the day, a mutual fund's price is based on a NAV calculation that is updated at the end of the business day.
The calculation for NAV is:
- NAV = (assets - liabilities) / total number of outstanding shares
A mutual fund calculates its NAV by determining the closing or last quoted price of all securities in its portfolio along with the total value of any additional assets the fund holds. Examples of additional assets a fund might hold include cash and liquid assets, receivables such as interest payments, and accrued income.
From these assets, the mutual fund then deducts its liabilities. Examples of a mutual fund's liabilities include payments and fees owed to banks, operational expenses, and foreign liabilities.
After deducting its liabilities from its assets, the mutual fund divides this number by its total number of outstanding shares to arrive at its NAV.
The reported NAV represents the price a buyer pays or a seller will receive for a fund's share the next trading day after deducting any commissions and brokerage fees.
NAV Update Time and Trade Cutoff Times
For investors, it's important to understand the difference between the NAV update time and the trade cutoff time. Most mutual funds have self-imposed NAV updating deadlines, which are closely tied to the cut-off times for NAV publications in newspapers and other publications. This is typically around 6 p.m. EST.
The trade cutoff time, however, is the time by which all buy and sell orders for a mutual fund must be processed. These orders are executed using the NAV of the trade date. For example, if a mutual fund's trade cutoff time is 2:00 p.m. EST, then trade orders must be processed before then to be filled at that business day's NAV. If an order comes in after the trade cutoff time, it will be filled using the next business day's NAV.