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Market Effects on Net Asset Value

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Market Effects on Net Asset Value

Even though shares in open-ended mutual funds are not traded on the secondary market, market forces have a powerful impact on a fund's net asset value (NAV).

Things To Know

  • Market panics can affect net asset values.
  • On the day a fund makes a distribution, its net asset value drops by the distribution amount.

How net asset values change

Net asset values fluctuate daily. They change according to the value of the assets in their portfolios, any liabilities they hold, and the number of shares outstanding (in public hands). As stock, bond, and other security prices move up or down in price, the net asset value of a fund changes, too. For example, if a fund has $10,000,000 divided by 1,000,000 shares, each share will be worth $10. Let's say that stock prices fall, lowering the fund's value to $9,500,000. Each share will then be worth $9.50.

When investors buy new shares of a fund, the fund has more money to buy securities. When investors redeem their shares, the fund has less money. Changing amounts of money affect the fund's ability to invest in new securities. This can affect its net asset value.

Panic plays a role too

Market panics can affect net asset values. Funds keep cash on hand to pay investors who redeem. However, should investors panic and redeem like crazy, funds may need to sell some of their holdings to pay investors.

A fund's payouts play a role

Fund payouts also affect net asset values. Payouts include dividend distributions, capital gains distributions, and various expenses. On the day a fund makes a distribution, its net asset value drops by the distribution amount. To illustrate: If your fund makes a distribution of 21 cents per share, and it was selling at 15 dollars per share yesterday, it will fall to $14.79 per share. If your fund's NAV drops on a day when the market is otherwise roaring, it may be because it is making a distribution.

Because the market fluctuations in underlying securities prices will determine the performance of your mutual fund, you should choose funds that invest in securities that will meet your investment objectives.