June 13, 2024

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Last updated: June 29, 2024

# Master Mutual Fund Pricing

By: Securities Institute Staff

## How To Master Mutual Fund Pricing And Pass The Series 6 Examand become an Investment Company Representative

One of the keys to passing the series 6 exam is to make sure that you have a complete understanding of how mutual fund pricing will be tested on the Series 6 Exam. This article which was produced from material contained in our series 6 textbook and will help you master the material so that you pass the series 6 exam.

#### How to Value Mutual Fund Shares

Mutual funds must determine the net asset value of the fund’s shares at least once per business day. Most mutual funds will price their shares at the close of business of the NYSE (4 p.m. EST). The mutual fund prospectus will provide the best answer as to when the fund calculates the price of its shares. The calculation is required to determine both the redemption price (NAV) and the purchase price (POP) of the fund’s shares. The price that is received by an investor who is redeeming shares and the price that is paid by an investor who is purchasing shares will be based on the price that is next calculated after the fund has received the investor’s order. This is known as forward pricing. To calculate the fund’s NAV use the following formula:

assets – liabilities = net asset value

To determine the NAV per share simply divide the total net asset value by the total number of outstanding shares.

total NAV
total # of shares

#### Test Focus!

If XYZ mutual fund has \$10,000,000 in assets and \$500,000 in liabilities, what is the fund’s NAV?

assets – liabilities = NAV

\$10,000,000 – \$500,000 = \$9,500,000

If XYZ has 1,000,000 shares outstanding, its NAV per share would be:

total NAV                     \$9,500,000
total # of shares           1,000,000

NAV per share = \$9.50

#### Changes in the NAV

The net asset value of a mutual fund is constantly changing as security prices fluctuate and as the mutual fund conducts its business. The following illustrates how the NAV per share will be affected given certain events.

#### Increases in the NAV

The net asset value of the mutual fund will increase if:

• The value of the securities in the portfolio increase
• The portfolio receives investment income, such as interest payments from bonds

#### Decreases in the NAV

The net asset value will decrease if:

• The value of the securities in the portfolio fall
• The fund distributes dividends or capital gains

#### No Effect on the NAV

The following will have no effect on the net asset value of the mutual fund share:

• Investor purchases and redemptions
• Portfolio purchases and sales of securities
• Sales charges

#### Open-End Funds

The maximum allowable sales charge that an open-end fund may charge is 81/2% of the POP. The sales charge that may be assessed by a particular fund will be detailed in the fund’s prospectus. It is important to note that the sales charge is not an expense of the fund; it is a cost of distribution, which is borne by the investor. The sales charges pay for all of the following:

• Underwriters’ commission
• Commission to brokerage firms and Registered Representatives

#### Closed-End Funds

Closed-end funds do not charge a sales charge to invest. An investor who wants to purchase a closed-end fund will pay the current market price plus whatever their brokerage firm charges them to execute the order.

A front-end load is a sales charge that the investor pays when they purchase shares. The sales charge is added to the NAV of the fund and the investor purchases the shares at the POP. The sales charge, in essence, is deducted from the gross amount invested and the remaining amount is invested in the portfolio at the NAV. Shares that charge a front-end load are known as “A” shares.

Example

XYZ mutual fund has a NAV of \$9.50, a POP of \$10, and a sales charge percentage of 5%. How much sales charges would an investor pay if they were to invest \$10,000 in the fund?

A back-end load is also known as a contingent deferred sales charge (CDSC). An investor in a fund that charges a back-end load will pay the sales charge at the time of redemption of the fund shares. The sales charge will be assessed on the value of the shares that have been redeemed and the amount of the sales charge will decline as the holding period for the investor increases. The following is a hypothetical back-end load schedule:

The mutual fund prospectus will detail the particular schedule for back-end load sales charges. Mutual fund shares that charge a back-end load are also known as “B” shares.

#### Other Types of Sales Charges

There are other ways in which a mutual fund assesses a sales charge. Shares that charge a level load based on the NAV are known as level-load funds, or “C” shares. Shares that charge an asset-based fee and a back-end load are known as “D” shares.

B

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