3.1.3. How Mutual Funds Do Business
The price 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, adding other assets (such as accrued income), and then 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.
Example: ABC Mutual Fund contains securities with a total market value of $30,000,000, accounts receivable of $300,000, unpaid dividends of $50,000, and total liabilities of $9,000,000. The fund has issued 2,000,000 shares. To calculate the fund’s NAV, add the total value of its securities to its other assets. Doing so gives a value of $30,350,000 ($30,000,000 + $300,000 + $50,000). Then subtract the fund’s liabilities to get its book value, which is $21,350,000 ($30,350,000 – $9,000,000). To calculate per-share NAV, divide the fund’s book value by the number of outstanding shares, which gives a value of $10.68 ($21,350,000 / 2,000,000).
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 Auth