NAV and POP apply specifically to open-ended mutual funds that can only be purchased and redeemed directly from the fund company. Shares of these funds do not trade in the secondary market. Closed-end funds and Exchange-Traded Funds trade on the exchanges, and they are quoted with a bid and ask price just like other single securities such as stocks and bonds. Conceptually speaking, the NAV is equivalent to the bid price, which is the price that the fund company will pay to shareholders who are selling their shares back.
The POP equals the ask price, which is the price that the fund company charges buyers. The difference between these prices typically equals the amount of the sales charge that the company is assessing on the purchase. The formula used by the fund companies to determine the Net Asset Value per share of a fund is fairly simple. The total liabilities of the fund are subtracted from the total assets and the remainder is then simply divided by the total number of fund shares. Why It Matters.
Because the NAV of a fund reflects the composite prices of all of the securities it holds, it will rise when the price of the majority of those securities rises and fall when they fall.
Investors can therefore watch the NAV to see whether their funds are increasing or decreasing in value. However, the price of open-ended funds cannot be inflated by investor demand the way they can with a stock or other security that trades in a secondary market, because, as with the namesake they bear, open-ended funds theoretically have no limit on the number of shares that can be issued.
The Bottom Line. This price is recalculated every day based on the changes in price of those securities. Market Overview. Research Overview. Education Resources. Education Overview. Help When You Need It. General Investing. College Planning Accounts. Small Business Accounts. Open an account. Open Menu bar. Ask Merrill. Why Merrill Edge. General Investing Online Brokerage Account. Life events. Life priorities.
Investor education. Tools and calculators. Contact us. Open an account with Merrill. Text size: aA aA aA. When investing in mutual funds, investors can choose between open- and closed-end funds. Understanding how each works can help you make the right decision. You invest your money in an open-end mutual fund by buying shares at the net asset value NAV.
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List of Partners vendors. Intuition tells us that a mutual fund's net asset value NAV the net value of all assets within the mutual fund's portfolio divided by the number of outstanding shares should be identical to its market price, but often, the market price of a closed-end mutual fund a fund with a fixed number of issued shares that can't be altered will trade either above or below its NAV.
When this situation occurs and the fund is trading above this price, it is said to be trading at a premium ; conversely, when the fund is trading below this price, it is said to be trading at a discount. Here are some possible reasons for why these funds trade at premiums or discounts:.
The fundamentals of supply and demand will adjust the trading price of a mutual fund compared to its NAV. If the fund is in high demand and low supply, the market price will typically exceed the NAV. If there is low demand and much supply, the market price will usually be lower than the NAV. Another reason why there may be a price deviation between the NAV and market price is the management team responsible for the fund itself.
Sometimes, if the manager is highly regarded, a premium will be paid by investors wishing to hold the fund. If the management is not as highly regarded, the fund may trade at a discount. Similar to a stock, the expectation that a mutual fund will perform well may affect whether the market price is above or below the NAV.
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