Mutual Fund Valuation - Net Asset Value

• NAV is the value of a mutual fund's assets (securities plus cash net of expenses) at the end of each trading day divided by the number of shares outstanding.
• Unlike stocks, mutual fund transactions are executed in dollar amounts rather than number of shares, thus there is no penalty for trading in uneven lots.
• The price of mutual fund shares is not determined by bidding on the fund shares.
• The number of shares outstanding is always equal to the quantity demanded, as new shares are created to cover any excess of cash inflows and dissolved in proportion to excess cash outflows.
• Thus, the per-share price of a mutual fund (its NAV) is not subject to the forces of supply and demand
• and responding to fluctuations in NAVs as if they were driven by supply and demand is irrational and will lead to dysfunctional investor behavior.
• NAV is determined solely by the value of the underlying securities.
• Short-term mispricing of the underlying securities can result in over- or undervaluation of mutual fund shares, but this is not due to bidding on the funds' shares. It is due to bidding on the securities owned by the fund.
• If the value of the underlying securities are in aggregate over- or undervalued, the NAV will be over- or undervalued in direct proportion to the mispricing of the underlying securities. For example, technology stocks were overpriced during the Dot-Com boom and that overpricing was reflected in the NAVs of technology funds.
• Rebalancing on a regular basis takes advantage of such mispricing by systematically selling overvalued shares (selling high) and buying undervalued shares (buying low).

• Mutual Fund Prices: How They're Determined
• Interpreting and Responding to Mutual Fund Price Fluctuations