3.1.3. How Mutual Funds Do Business
The price of a mutual fund is calculated from the net asset value (NAV) of the fund. The NAV is the book value of the fund and is calculated by determining the fair market value of the securities in the fund and subtracting the fund’s liabilities. The book value is then divided by the number of shares in the fund to yield the NAV per share.
The investment company uses the proceeds from the sales of shares to purchase more securities in the fund. The NAV must be computed at least once each business day, typically after the close of the market (4:00 p.m. ET). The NAV is reported to both FINRA and the financial media.
Note: The price of a share in a mutual fund is not driven by the fund’s supply and demand. When more people purchase shares in the fund, the price does not necessarily increase. Instead, the price is based on the performance of the securities in the fund. The NAV can change daily because the market value of a fund’s portfolio fluctuates, as does the number of outstanding shares.
The price that is charged to the public is called the p