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How is a Mutual Fund’s Share Price (NAV) Determined?

Last updated by on December 30, 2013

How is a Mutual Funds Share Price Determined?

During a lunch recently, ‘Matt’, a colleague, and I were discussing investments and the topic turned to mutual funds. I proceeded to tell him a few funds that I had in mind and why I liked them. The conversation then turned to how I choose mutual funds, primarily how to choose a good mutual fund manager whose strategy matches your goals. When it comes to this topic, there are a few mutual fund managers that I hold in high esteem and I began to talk about them. Matt then asked the question, “well if everyone else thinks that this mutual fund manager is great, then won’t the mutual fund price become inflated?”.

net asset value NAVFor those with a strong background in mutual fund investing, this misconception is one that is easy to overlook when talking to others about mutual funds. Many investors assume that because mutual funds have a price per ‘share’, then their value is determined on the open market by investors who buy and sell shares. In the case of a certain type of mutual fund, this is the case.

However, in most cases, investors need not worry that the price of a mutual fund they are buying has been ‘pumped’. I’ve openly promoted certain mutual funds on this site, but in every case they’ve been open ended funds (we’ll discuss later). My promotion of these funds has no effect on the share prices of these funds. Let’s take a look at why this may be.

How Net Asset Value (NAV) Determines a Mutual Fund’s Share Price

Net Asset Value (NAV) is the total value of all of a funds assets minus it’s liabilities divided by the number of outstanding shares for that fund. For instance, if a mutual fund has $100 million in assets and $10 million in liabilities, it’s net assets are $90 million. If this same mutual fund happens to have issued 9 million outstanding shares to investors, then it’s price per share (or NAV) is $10. Here’s the formula:

NAV = (assets – liabilities)/shares outstanding

The Difference Between Mutual Fund and Stock Share Prices

Stock share prices

Stock share prices are determined on the open market based on investor’s perceptions of the value of a share. Often times, these perceptions are based on a number of factor’s including the stock’s current earnings per share, and expected future earnings per share. A number of macro and micro economic factors are taken into consideration, but the important thing to know is that a stock’s share price is fluid and based on perceived value. If more people want to buy the stock than sell it, the share price trends upward. If more people want to sell the stock than buy it, it will trend downwards.

Mutual fund share prices

Mutual fund prices are based on the fund’s holdings rather than a perceived value of that fund. For instance, let’s assume that a mutual fund owns a total of 10 different stocks, which wrapped up a trading session at $20 per share. For simplicity, let’s say that this fund has zero liabilities and owns 2 shares of each stock. Meanwhile, the fund has sold a total of 10 shares. This fund would have a NAV of $40, here’s how: NAV = ($20 x 10 stocks x 2 shares – $0 liabilities)/10 shares = $40. The price of a share is not at all based on demand for that share.

Fund Share Prices: The Law of Supply and Demand at Work

The main reason why a stock share price can be influenced by outside factors and a mutual fund’s price cannot comes down to the law of supply and demand. At any given time, a company only has a certain limited number of shares available that are trading on the market. These shares are released during an initial public offering (IPO). Companies can later release more shares (secondary offerings), if they’d like, but it often has a large devaluing effect on the already existing shares.

At the same time, mutual funds create as many shares as there are demand for, and sell and buy them back from you at the NAV price. They do not trade on the open markets, as stocks do. You typically get the price of the fund at the end of that trading session if you purchased before the closing bell, or at the end of the next trading session if you purchased after hours. In the case of mutual funds, unlimited supply equals an asset with a value that is not influenced by outside demand (or lack of).

The Exception: Closed End Funds Prices

There is one exception to everything we’ve discussed thus far, closed end funds. Everything mentioned in this article prior was in reference to ‘open ended’ mutual funds, which make up the vast majority of mutual funds out there. In contrast, a closed end fund is a certain type of mutual fund that has a limited number of shares that trade on the open market, much like a stock.

Often times, these funds will trade at a discount to their NAV and investors will purchase them hoping to make a gain if the fund starts trading closer to it’s NAV. You may find it hard to believe that a closed end fund would trade at a discount to it’s NAV, but it does happen on a regular basis. In general, if you don’t understand the reasons why these funds would sell at a discount to their NAV, you’re probably better off steering clear of them and sticking with open ended funds.

Mutual Fund Share Price Discussion

How did you think mutual funds were valued?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Michael says:

    Great post, G.E. I had the same misconception about mutual funds and was concerned about inflated value for the same reason. Nice to know that’s not a concern when evaluating open ended mutual funds. Thanks.

  • Premium Financing says:

    Thanks for the information i also had some of those errors in the way i thought that you’ve outlined. To be fair i didint even know there was two types of funds, open and closed lol.

  • James says:

    Thank goodness that individual fund managers really do not matter all that much any more. In many cases the team of nerds that track each sector have as much or to do with the success of a fund. I never was comfortable with trusting all my hard earned cash to one individual that may or may not be all that stable.

  • Sheriece says:

    Not my area of expertise, but interesting none the less. I have always had my funds managed, they haven’t faired very well. Thanks for the info.

  • rahul says:

    Useful information presented consicely.

  • Gregg says:

    Great description except for seconday offerings. There is only value destruction or dilution if secondary shares are issued below market prices. Corporate Finance 101.

  • Dean says:

    Let me try to understand this correctly: If there are demands then the fund manager can issue more shares as needed, wouldn’t that reduce the fund’s price then?

  • AH says:

    Can supply and demand not have an effect?

    It would require significant investment, but with increased demand for the fund, you have increased money flowing into the fund.

    This then in turn would cause incresed money flows (demand)to the assets into which the fund is invested.
    The demand for the underlying increases, therefore the price rises, therefore the NAV of the fund increases?

  • Gregg says:


    You are right that the NAV would increase, but so would all the underlying securities as well as all other funds that hold those securities.

    Think of how much buying pressure there would need to be in a mutual fund so that there is (on average) a price impact on all ther shares held in the fund. This hypothetical works, but not in practice.

  • Mike says:

    OK help me understand this, I just bought a lot of VTTVX shares. Should I be looking at the stock price which is about 14.75 or the NAV price which is listed at 18.01. Is this fund an open ended fund?
    What is your opinion of this fund?


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