Browse Analysis of Managed and Structured Products

17.4 Pricing Mutual Fund Units

Learn how to calculate a mutual fund’s net asset value per share (NAVPS) and understand the pricing mechanisms of mutual fund units in this guide. Explore the influences of associated charges and best practices in processing orders.

Calculate a Fund’s Net Asset Value Per Share (NAVPS) and Pricing Mechanisms

Mutual fund shares or units are typically purchased directly from the fund, often through a distributor, and redeemed directly back to the fund. Due to this continuous cycle of primary distribution, these transactions do not occur on secondary markets. Prior to purchasing any mutual fund units, the investor is required to receive a Fund Facts document.

Offering Price and NAVPS Calculation

The price paid by an investor for a share or unit is known as its offering price. This price is derived from the Net Asset Value Per Share (NAVPS) at the close of business on the day the order was placed.

**NAVPS Formula: **

$$NAVPS = \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Total Number of Shares or Units Outstanding}}$$

The NAVPS signifies the theoretical value that would be distributed to shareholders if the fund liquidated all investments, paid off all liabilities, and distributed the net remaining assets. It is used both for pricing new shares and for computing redemption prices.

Example Calculation

Consider the ABC Fund with the following details:

  • Total Assets: $13,000,000
  • Total Liabilities: $1,000,000
  • Units Outstanding: 1,000,000

To calculate NAVPS:

$$ NAVPS = \frac{13,000,000 - 1,000,000}{1,000,000} = \frac{12,000,000}{1,000,000} = 12 $$

Thus, the NAVPS of ABC Fund is $12. This value is used as the offering and redemption price, assuming no additional sales charges or fees.

Mulutual Fund Pricing: Deadlines and Process

Mutual Funds calculate the offering or redemption price at the close of the market each day. An accepted industry practice mandates a general deadline, typically 4:00 p.m. ET, for orders to be processed at the end of the day’s price. Orders placed after this deadline are processed using the value calculated at the close of the next business day.

Reps must transmit orders to the central fund office the same day they are received. Payments for redeemed securities are typically made within two business days after the NAVPS determination.

Frequency of NAVPS Calculation

The frequency of computing NAVPS can vary:

  • New Funds: Must calculate NAVPS at least weekly.
  • Established Funds (pre-regulation): May continue monthly calculations if applied before regulations.
  • Large Funds: Typically compute NAVPS daily post-market closure.
  • Other variability occurs among funds based on specific rules and regulatory guidelines.

Exception: Real estate funds might compute NAVPS annually, with most opting for a quarterly basis.

Impacts of Charges Associated with Mutual Funds

Analyzing related charges is pivotal. Fees like sales commissions, management fees, and administrative costs can influence the final offering price and net returns from a reinvestment perspective. Understanding and incorporating these charges when analyzing mutual fund investments is crucial.

Key Takeways:

  1. NAVPS Calculation: Essential for mutual fund pricing and redemption computation.
  2. Offering and Redemption Price: Directly related to NAVPS and market timings for accuracy.
  3. Order Timing and Processing: Critical for efficient handling and investor satisfaction.
  4. Frequent NAVPS Calculation: Eases processing while ensuring accurate pricing, especially for large funds.

Frequently Asked Questions

What is NAVPS?

NAVPS (Net Asset Value Per Share) is the calculation that determines the value of one share or unit of a mutual fund, determining distribution amounts if the funds are liquidated.

How do charges impact mutual fund investment?

Fees and administrative costs decrease the fund’s total assets, which directly reduces the NAVPS value and returns for the investors.


  • NAVPS: Net Asset Value Per Share
  • Offering Price: The cost at which an investor purchases a share or unit
  • Redemption Price: The value obtained when an investor sells back a unit to the fund
  • Primary Distribution: The continuous buying and selling of mutual fund units exclusively between investors and the fund itself.

Charts and Diagrams

    flowchart TB
	  A[Total Assets #40;$13,000,000#41;] -->|Subtract| B[Total Liabilities #40;$1,000,000#41;]
	  B -->|Divide by| C[Total Number of Shares #40;1,000,000#41;]
	  C -->|Equals| D[NAVPS = $12]

Order Processing Timeline

	  participant Investor
	  participant Fund
	  participant Market
	  Investor->>Fund: Submits Order
	  Fund->>Market: Confirms Market Close NAVPS #40;4:00 p.m. ET#41;
	  Market->>Fund: Provides End Day NAVPS
	  Fund->>Investor: Confirms Order#59; Process Payment #40;Within Two Days#41;

By comprehending the exact methodology of calculating and leveraging the NAVPS, investors can better strategize their mutual fund transactions to maximize returns and plan redeemments effectively.

CSC® Exams Practice Questions

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## What does NAVPS stand for in the context of mutual funds? - [ ] National Asset Value Per Share - [ ] Nominal Asset Value Per Share - [ ] Normal Asset Value Per Share - [x] Net Asset Value Per Share > **Explanation:** NAVPS stands for Net Asset Value Per Share, which indicates the value per share/unit of a fund. ## When must a mutual fund representative transmit an order for purchase or redemption? - [x] On the same day the order is received - [ ] Within one business day - [ ] Within two business days - [ ] Within a week > **Explanation:** Mutual fund representatives are expected to transmit any order for purchase or redemption on the same day the order is received. ## What happens if you place a purchase or redemption order after the 4:00 p.m. ET deadline? - [ ] The order is canceled - [ ] The order is processed immediately - [x] The order is processed at the price calculated at the end of the next business day - [ ] The order is invalid > **Explanation:** Orders received after the 4:00 p.m. ET deadline are processed at the price calculated at the end of the next business day. ## How often must new mutual funds calculate their NAVPS by regulation? - [ ] Once a month - [ ] Daily - [ ] Quarterly - [x] At least once a week > **Explanation:** Regulation requires that new funds calculate NAVPS at least once a week. ## What does the Fund Facts document provide to the purchaser? - [ ] Information about the market conditions - [ ] Information about other investors in the fund - [x] Information about the mutual fund they are buying - [ ] Information about other mutual funds available > **Explanation:** The Fund Facts document provides essential information about the mutual fund that the purchaser is considering. ## What is the offering price of a mutual fund unit based on? - [ ] The next day's NAVPS - [x] The NAVPS at the close of business on the day the order was placed - [ ] The highest NAVPS of the week - [ ] An average NAVPS over a month > **Explanation:** The offering price is based on the NAVPS at the close of business on the day the order was placed. ## If a fund does not charge a sales commission, what price does an investor pay? - [x] The fund’s current NAVPS - [ ] A discounted price based on the NAVPS - [ ] An average price of the past month’s NAVPS - [ ] A price set by the fund manager > **Explanation:** If there are no sales commissions, the investor pays the current NAVPS. ## What is the formula to calculate NAVPS? - [ ] Total Liabilities - Total Assets / Total Number of Shares - [ ] Total Assets + Total Liabilities / Total Number of Shares - [ ] Total Revenue - Total Operational Costs / Total Number of Shares - [x] Total Assets - Total Liabilities / Total Number of Shares > **Explanation:** NAVPS is calculated as (Total Assets - Total Liabilities) / Total Number of Shares or Units Outstanding. ## When are most large funds likely to calculate their NAVPS? - [ ] Weekly - [ ] Monthly - [ ] Quarterly - [x] Each business day after the markets have closed > **Explanation:** Most large funds calculate NAVPS each business day after the markets have closed. ## In the example given, if ABC fund has assets of $13,000,000, liabilities of $1,000,000, and 1,000,000 units outstanding, what is the NAVPS? - [ ] $10 - [ ] $11 - [x] $12 - [ ] $13 > **Explanation:** Using the formula NAVPS = (Total Assets - Total Liabilities) / Total Number of Shares, we have NAVPS = ($13,000,000 - $1,000,000) / 1,000,000 = $12.

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In this section

  • 17.4.1 Charges Associated With Mutual Funds
    Learn about various charges associated with mutual funds including front-end loads, back-end loads, trailer fees, management fees, and more. Understand how these fees impact your investments and use tools provided by regulatory authorities to calculate their effects.
Sunday, July 21, 2024