Mutual Funds Overview
Mutual funds are the cornerstone of the Series 6 exam. As an open-end investment company, mutual funds pool money from many investors to purchase a diversified portfolio of securities managed by professional investment advisers.
What is a Mutual Fund?
A mutual fund (open-end investment company) is an investment vehicle that:
- Pools money from many investors
- Invests in a diversified portfolio of securities
- Is professionally managed
- Issues redeemable shares continuously
- Prices shares once daily (after market close)
Unlike stocks, mutual fund shares are not traded on exchanges. Instead, investors buy from and sell back to the fund itself.
Net Asset Value (NAV)
The Net Asset Value (NAV) is the per-share value of a mutual fund. It's calculated daily after the markets close (typically 4:00 PM ET).
NAV Formula
NAV = (Total Assets - Total Liabilities) ÷ Shares Outstanding
Example: A fund has $100 million in assets, $2 million in liabilities, and 8 million shares outstanding:
- NAV = ($100M - $2M) ÷ 8M = $12.25 per share
What Affects NAV?
| Event | Effect on NAV |
|---|---|
| Market value of securities rises | NAV increases |
| Market value of securities falls | NAV decreases |
| Fund pays dividends/distributions | NAV decreases |
| New investor buys shares | No change |
| Investor redeems shares | No change |
Key Point: Investor purchases and redemptions don't affect NAV because shares are issued/redeemed at NAV. The fund's assets change proportionally with the number of shares.
Forward Pricing
Mutual funds use forward pricing under SEC Rule 22c-1. This means:
- Orders receive the next calculated NAV after the order is placed
- If you order before 4:00 PM ET, you get that day's closing NAV
- If you order after 4:00 PM ET, you get the next business day's NAV
Exam Tip: Forward pricing means investors never know the exact price they'll pay or receive until after the market closes.
Public Offering Price (POP)
When you buy mutual fund shares, you typically pay the Public Offering Price (POP):
POP = NAV + Sales Charge
For no-load funds, POP = NAV.
Key Parties in a Mutual Fund
| Party | Role |
|---|---|
| Investment Adviser | Makes buy/sell decisions for the portfolio |
| Board of Directors | Oversees fund operations (at least 40% independent) |
| Custodian | Holds the fund's cash and securities |
| Transfer Agent | Maintains shareholder records, processes transactions |
| Underwriter/Distributor | Markets and sells fund shares |
Benefits of Mutual Funds
- Diversification — Spread risk across many securities
- Professional Management — Expert portfolio managers
- Liquidity — Redeem shares any business day at NAV
- Convenience — Automatic reinvestment, systematic plans
- Affordability — Low minimum investments
- Transparency — Regular disclosure of holdings and performance
A mutual fund has total assets of $50 million, liabilities of $1 million, and 4 million shares outstanding. What is the NAV per share?
Under forward pricing, an investor places a mutual fund order at 2:00 PM ET. At what price will the order be executed?
When a mutual fund pays a dividend distribution to shareholders, what happens to the NAV?
2.2 Types of Mutual Funds
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