Have you ever wondered how the price of a mutual fund is determined? What makes the digits tick? Why must there be four decimal points in the price? In this article, we shall find the answers.
The published price is actually the net asset value (NAV) of the fund. What is NAV?
Quoting Investopedia:
“Net asset value (NAV) is value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time. With both security types, the per-share dollar amount of the fund is based on the total value of all the securities in its portfolio, any liabilities the fund has and the number of fund shares outstanding.
(Investopedia Definition Link)”
In essence, NAV is the value of a fund’s total assets minus liabilities. This valuation is normally conducted once every business day. Why must the price be rounded to four decimal places? It is the order of Securities Commission. In fact, all the rules regarding mutual fund is outlined in the Guidelines on Unit Trust Funds established by them.
Published price ≠ transaction price?
Have you ever bought a fund but found that the price was not the same as what you saw? I bet you did. Why does this happen? This is due to the price of a fund is based on forward pricing in Malaysia. This means that if you transact today, closing price of the market today will be the price that you pay.
Furthermore, the price that we see for a mutual fund is usually the price one to two working days before. Why is there a delay in the publication of the price? This is because the fund manager requires approximately one to two business days to consolidate and derive a unit price. The price also needs to be valued by the fund’s trustees. Thus, combined with forward pricing, the price that we see may not be the price that we will actually get.
Another thing to take note of is the transaction time. If you transact before 3 or 4pm (depending on the fund companies), the transaction price for the mutual fund will be based on the price of that day. For example, if you put an order today before 3pm, the transaction price will be NAV of today. However, if the order is later than that, your transaction will be priced on the next business day.
Nonetheless, if you are lucky (or unlucky), you will get the exact price as you see if the valuation remains the same. That concludes the determination of the price of a mutual fund.
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