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Buying and selling mutual funds shares is unlike trading stocks or bonds in the secondary
market. If you recall, a security that trades in the secondary market is negotiable (most
securities are transacted this way). Mutual funds do not trade between investors; they may only
be bought from or sold to the fund issuer. Because of how their transactions work, mutual funds
are known as redeemable securities. If you need a quick refresher, here’s a video you watched
from a previous chapter detailing the differences between negotiable and redeemable
securities:
When an investor buys mutual fund shares, their money goes directly to the fund’s portfolio to
be invested. When an investor sells their mutual fund shares, the fund must pay the value of the
shares using cash in the fund. If the fund is short on cash, the fund manager must liquidate
securities to make the payment.
For comparison, investors trading negotiable securities do not transact directly with the issuer. If
you were to purchase shares of Microsoft stock in the secondary market, you would buy from
another investor, not directly from Microsoft.
When a mutual fund transaction occurs, the foundation for the price per share is the net asset
value (NAV). The NAV represents the value of the fund on a per-share basis. For example:
ABC mutual fund has $100 million of net assets in securities and 1 million shares outstanding.
With this information, we can calculate the NAV.
NAV=shares outstandingnet assets
NAV=1,000,000$100,000,000
NAV=$100
Funds maintain assets and liabilities, which is why NAV references net assets. Liabilities include
required payouts (redemptions) to investors, management fees, and administrative costs. The
fund subtracts liabilities from portfolio assets (securities and cash held in the fund) to determine
net assets. Net assets is divided by the number of outstanding shares to determine the NAV on
a per share basis.
The most significant factor influencing the NAV is the current market value of the portfolio’s
securities. At the end of every trading day, each mutual fund calculates the total market value of
all its securities and releases its NAV to the public after market close.
To further demonstrate this, let’s look at the Putnam Growth Opportunities Fund; ticker:
POGAX. As of March 2023, the fund’s top three investments were Apple, Microsoft,
and Alphabet. To make it easy, assume these are the only three investments in the fund. If the
three stocks increase in value, the fund’s NAV rises (and vice versa).
Forward pricing
When an investor buys or sells a mutual fund, they are subject to forward pricing. Unlike stocks
and bonds, which can be traded whenever the market is open, mutual funds only allow
transactions to occur once daily at the market close. The cut-off time for mutual fund purchases
and sales is 4:00 pm ET, the closing time for the stock markets. If you were to place a buy order
for a mutual fund before 4:00 pm ET, you would receive that day’s NAV, also known as the fund’s
“closing price.”
Remember, mutual funds don’t start calculating their daily NAVs until after the market closes.
Once it closes, the fund calculates the market value of all of its securities, plus factors in
deposits and withdrawals. This data is then used to calculate the fund’s new overall NAV. The
term ‘forward pricing’ comes from this pricing structure. When a customer submits a
transaction request, they do not know the NAV price they will be subject to. The NAV, which will
be the basis for the customer’s transaction price, will be “forwardly” calculated (in the future).
If an investor’s purchase or sale is placed after 4:00 pm ET, it will revert to the next business
day’s closing NAV. It could be a while for the transaction to occur, especially if the request is
placed on a Friday night after the market closes. In this scenario, the transaction executes when
the NAV is calculated Monday evening.
Most investors transact in dollar amounts to ensure they don’t overspend on their mutual
funds. For example, a customer would typically submit an order to purchase $10,000 instead of
a specific share amount. They may not know how many shares they’ll receive, but they won’t
spend more than $10,000. In case you’re wondering, shares are transacted in fractions. Let’s
demonstrate this concept:
An investor purchases $10,000 of ABC mutual fund shares at a NAV of $25.50. How many shares
did they purchase?
Shares purchased=NAVoverall purchase
Shares purchased=$25.50$10,000
Shares purchased=392.157
As you can see, mutual fund shares can be purchased in fractional form in thousandths (up to 3
decimal places).
NAV vs. POP
Sometimes, mutual funds are sold at their NAV, especially if the mutual fund is bought directly
from the sponsor. For example, Vanguard customers buy Vanguard funds at the NAV. However, if
a Fidelity customer purchased a Vanguard fund, they would likely pay a sales charge in addition
to the NAV cost.
To compensate the selling group (other financial firms selling the mutual fund) for distributing
the shares, sales charges can be assessed on mutual fund transactions. The selling group
purchases the shares at the NAV from the fund sponsor, then resells the shares with an added
sales charge. The most common type of sales charge is a front-end load, which is assessed
when customers purchase shares. There are also back-end loads, which are charged when
customers liquidate (sell) their shares.
Definitions
Load
A synonym for sales charge
We’ll discuss the specifics of share classes in the next chapter. For the rest of this chapter, we’ll
only discuss front-end loaded funds (known as Class A shares).
Investors purchase front-end loaded funds at the public offering price (POP). The POP is the
NAV plus any applicable sales charge. In equation form, it looks like this:
POP=NAV+SC
When a selling group member sells shares of a front-end loaded fund, they charge for the value
of the shares (NAV) plus the amount they’re compensated (the sales charge). The total amount
is the public offering price. For example, if an investor purchased a fund share with a $20 NAV
and a sales charge equal to $1, the POP (what they pay overall) is $21.
Any sales charge assessed is based on the POP, not the NAV. The maximum sales charge that can
be assessed is 8.5% of the POP according to FINRA rules. What would a fund purchase look like
with a sales charge? First, let’s refresh and remind ourselves what it looks like without a sales
charge.
An investor purchases $10,000 of no-load ABC mutual fund shares at a NAV of $25.50. How
many shares did they purchase?
Shares purchased=NAVoverall purchase
Shares purchased=$25.50$10,000
Shares purchased=392.157
Our calculations are the same as if there is no sales charge (no-load). The math changes slightly
with a sales charge, as we first need to calculate the public offering price.
ABC mutual fund has a NAV of $25.50 and a 5% sales charge. What is the POP?
POP=100% - SC%NAV
POP=100% -5%$25.50
POP=95% $25.50
POP=$26.84
Now that we calculated POP, we can determine how many shares are obtained with simple
division.
Shares purchased=POPOverall purchase
Shares purchased=$26.84$10,000
Shares purchased=372.578
For the calculation above, you’ll either use NAV or POP dependent on the status of the sales
charge. If there is no sales charge, NAV is used. If there is a sales charge, POP is used.
With the NAV and sales charge percentages, you can find the price per share the customer must
pay (POP). As you can see, the customer buys fewer shares when a sales charge is involved.
Generally, two types of exam questions require calculating the POP. The formula used depends
on how the sales charge is presented. Here’s the summary of both formulas:
If the sales charge is in percent (%)
POP=100% - SC%NAV
If the sales charge is in dollars ($)
POP=NAV+SC

Calculating a sales charge is also a testable topic. If you were provided a fund’s NAV and POP,
you could be asked for its sales charge percentage. Here’s how it can be calculated:
SC%=POPPOP - NAV
Let’s use the numbers we utilized before to demonstrate this formula.
ABC mutual fund has a NAV of $25.50 and a POP of $26.84. What is the sales charge?
Can you confirm a 5% sales charge using the percent formula above?
(spoiler)
SC%=POPPOP - NAV
SC%=$26.84$26.84 - $25.50
SC%=$26.84$1.34
SC%=0.05 = 5%
Sure enough, it works!
Sometimes the POP is called the “ask” and the NAV is called the “bid.” After a few years in
finance, you’ll be well acquainted with bid/ask spreads. When firms trade securities with the
public, they establish a bid/ask. The ask represents the firm’s “asking price” for a security, or
what a customer must pay to buy it. This is why the POP is sometimes called the “ask.” The bid
represents what the firm is “bidding” for a security, or the price an investor could sell their
shares back to the firm. This is why the NAV is sometimes called the “bid.”
Sidenote
Redemption fees
While investors generally sell fund shares at the NAV, an additional redemption fee may be
assessed when the shares are liquidated. However, the redemption fee is not technically a sales
charge. Redemption fees are usually less than 1% (for example, a 0.5% redemption fee), and
must be disclosed in a fund’s prospectus.
Added requirements
As previously discussed, the maximum allowable sales charge is 8.5% of POP. If a fund assesses
the highest possible sales charge, it must offer a few extras to its investors.
First, customers must be allowed to reinvest their dividends and capital gains at the NAV
(avoiding a new sales charge). Funds distribute dividends when securities in the portfolio pay
income (like dividends from stock or interest from bonds) and capital gains when the fund
liquidates a security at a profit. Although there will be no sales charge, the customer will still be
subject to taxes due on the dividend or capital gain received.
When a fund makes a dividend or capital gains distribution, the value of the fund will fall.
Remember, the NAV represents the total value of assets in the fund. If the fund releases a
bunch of cash to investors, there will be less money in the fund (resulting in a declining NAV).
Most investors reinvest their mutual fund income, providing them with more shares. Dividend
and interest distributions occur frequently, but capital gains are generally only distributed once
per year.
Sidenote
Mutual fund settlement
While a fund transaction may maintain various settlement timeframes, mutual funds must fulfill
investor redemption requests within seven (7) days. If an investor sells their shares back to the
fund (also known as redeeming shares) on a Friday, the fund must make payment to the
investor by the following Friday.
Another requirement for funds assessing sales charges is the conversion (exchange) privilege.
No new sales charge is assessed if an investor sells their shares and uses the proceeds to
purchase a new fund within the same fund family. A fund family is a set of funds from the same
sponsor (for example, Vanguard funds are all part of the Vanguard fund family). Like reinvesting
dividends and capital gains, the transaction is taxable. If there’s a gain on the sale, the customer
will likely owe taxes on the transaction.
Key points
Mutual fund transactions
 Mutual funds are redeemable
 Transactions only occur with the issuer
 Completed through forward pricing
Net asset value (NAV)
 NAV=shares outstandingnet assets
 Fund value on a per share basis
 Calculated once per trading day
 Purchase price for no-load funds
Public offering price (POP)
 If sales charge given in percent (%)
o POP=100% - SC%NAV
 If the sales charge is given in dollars ($)
o POP=NAV+SC
Loaded fund transactions
 Bought at POP, sell at NAV
 POP is also known as the “ask” price
 NAV is also known as the “bid” price
 Max load = 8.5% of POP
 SC%=POPPOP - NAV
Mutual fund distributions
 Capital gains distributions may only occur once per year
 The BOD sets the ex-dividend date
Mutual fund redemptions
 Must be fulfilled within seven days