How To Calculate The Price Of A Mutual Fund

By Angel Broking | Published on 20th July 2021 | 39

How To Calculate The Price Of A Mutual Fund

Mutual funds are easy to understand financial tools and pretty transparent. Most mutual fund companies would publish lists of stocks and associated prices, called units. However, besides the cost of purchasing shares or units in a mutual fund scheme, there are few other charges that a mutual fund company will charge you. If you are investing in mutual funds, clarifying mutual fund pricing is critical to estimate the total cost.

Mutual funds have gained significant popularity among young investors in recent times, urging asset management companies to design customised investment products that would cater to a wide variety of investors with varied investment goals. It has also impacted the costs of investment depending on the unique features of the product.

Net asset value

The simplest way to calculate the price of a mutual fund is the net asset value (NAV). The NAV represents the total value of the mutual fund’s assets minus liabilities. Many mutual funds use NAV value as the price indicator of transacting units.

How is NAV calculated?

NAV is the value per share, measured as the total value of all the cash and securities in the fund’s portfolio minus its liabilities, divided by the number of outstanding shares. Investors need to understand how to calculate NAV to determine how their returns will be affected by the changes in its value.

Most mutual funds calculate NAV daily on the number of units transacted throughout the day because share prices present in the portfolio can change during the day, impacting the total value of the portfolio. Hence, mutual fund companies reestimate the value of their fund once daily. The method of valuation may vary, some might use the average of the last three traded prices, but it is a standard practice for all mutual fund companies to calculate NAV once daily.

When you purchase or sell mutual fund units, you transact directly with the fund. The cost of your transaction is calculated at the end of the day with the calculation of NAV. Hence, the cost of buying or selling can be different on the day from the previous day’s value which will impact the actual cost of your investment.

Key takeaways

  • Mutual fund investing involves the cost of purchasing share units and expense loads charged by the fund for managing your investment.
  • The cost of the fund is calculated based on NAV, which measures the total value of the shares in the portfolio, excluding liability and dividing it with the total number of units available.
  • The NAV is calculated once daily, based on the price change of stocks and the number of units traded.
  • The purchase price of the units depends on the previous day’s NAV.
  • Mutual fund prices go up when the value of the asset rises.
  • Mutual funds are different from index funds and ETFs since their price changes during the day. ETF funds trade in the exchange like regular stocks and depend on supply and demand.

The bottom line

It is easy to find the price of mutual funds, but the truth is no one knows what your investment will be worth when your order gets executed since the price change happens daily. You will come to know about it the next day. However, mutual funds are still a suitable investment for most investors. It offers portfolio diversification at a cheap rate and lets investors invest systematically and benefit from the compounding returns.