Shares of an open-end mutual fund are based on the assets the fund owns plus the number of shares outstanding. The price of a mutual fund goes up when the value of the assets within the fund appreciates or increases. Mutual fund prices are generally recalculated after the close of each trading day. On days when the markets are not open, prices of mutual funds remain unchanged.
Determining the NAV
Mutual fund prices are quoted as the net asset value, or NAV. To figure out the current NAV, the value of all assets owned by a fund is totaled and the amount is divided by number of shares outstanding. For example, if a mutual fund is selling at $8 a share, and the data shows there are 12 million shares outstanding. The total value of the fund would be $96 million. Assume the fund holds a 60-40 split of stocks and bonds, and the current value of stocks is $57.6 million, and bonds are $38.4 million. If the value of any asset within the fund increases, the price of the mutual fund shares goes up.
At the end of a trading day, mutual funds calculate their latest NAV. Continuing with the example from the previous step, If the total bonds owned by the fund decreased by 1 percent to $38,016,000, and the value of the stocks owned by the fund have increased by 1 percent to $58,176,000, the total value of fund would be $96,192,000. Assuming the number of shares outstanding remains the same for the day, the price of one share would equal $8.016 after reconciliation.
The number of shares outstanding can also affect the price of an open-end mutual fund. Using the example from the previous steps, assume instead of the number of shares remaining the same, 2 million were redeemed before the current NAV was set. If the total value of the fund's assets equals $96,192,000 and 10 million shares are outstanding, the price of one share in the fund would cost $9.6192, which is the total value divided by shares outstanding. Often, when shares of a fund are redeemed, the money is used to buy more assets, maintaining a stable and predictable NAV.
Closed-end mutual funds work differently than open-end funds that receive new money all the time. Shares in a closed-end fund are limited in number and do not trade as regularly as open-end funds. When the fund is first formed, a set amount of shares is offered to the public. Later, if an investor wishes to purchase shares in a closed fund, a seller must be found to make this possible. Prices of shares in closed-end funds may also increase through investor demand.
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