Series 7: 6.1.3 How Mutual Funds Do Business

6.1.3  How Mutual Funds Do Business

The cost of a mutual fund is determined by 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 the Financial Industry Regulatory Authority (FINRA) and the financial media.

The price that is charged to the public is called the public offering price (POP).

The public offering price is equal to the NAV per share plus a sales charge (if the fund is a “load” fund), or POP = NAV + sales charge. If the mutual fund is a “no-load” fund, POP = NAV. Load usually is the commission paid to brokers, but sometimes mutual funds that do not use brokers will still charge a sales load. The percentage sales charge is figured off the POP, rather than the NAV.

The pricing is done on a forward basis