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Posted by Jay on January 28, 2008, 8:08 am
Just wondering: When I place an order to invest 10K in a mutual fund
today, I get today's closing price as my purchase price. How?
My thinking is that after today's market close, the Mutual Fund adds
up all the deposits and withdrawals and gets the Net change. Then,
next day they go out and buy securities worth this net amount at the
prevailing market price of each individual security...how do they end
up guaranteeing the previous day's closing price? Won't they end up
with excess cash some times and a shortfall other times based on the
difference in prices from the previous day's close?
Thanks.
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Posted by Rich Carreiro on January 28, 2008, 10:56 am
> Just wondering: When I place an order to invest 10K in a mutual fund
> today, I get today's closing price as my purchase price. How?
>
> My thinking is that after today's market close, the Mutual Fund adds
> up all the deposits and withdrawals and gets the Net change. Then,
> next day they go out and buy securities worth this net amount at the
> prevailing market price of each individual security...how do they end
> up guaranteeing the previous day's closing price? Won't they end up
> with excess cash some times and a shortfall other times based on the
> difference in prices from the previous day's close?
After the market close, the fund prices and values its portfolio
and subtracts off any liabilities to arrive at net assets. It
then divides that by the number of shares outstanding to get NAV.
Once NAV is set, the fund can process purchases and redemptions.
It'll net the incoming requests to arrive at a net purchase or
net redemption figure. If it's a net purchase, the fund increases
its assets by the amount of the purchase and creates and issues
the appropriate number of shares. If it's a net redemption, the
fund decreases its assets (or creates a liability) and destroys
the appropriate number of shares. Since all these transactions
are at NAV, even though the fund's assets change, NAV remains
unchanged.
Once this is all done (and it happens instantly), NAV is no longer
relevant until the close of the next business day. So there's
nothing to "guarantee".
--
Rich Carreiro rlc-news@rlcarr.com
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Posted by on January 28, 2008, 11:32 am
> Once NAV is set, the fund can process purchases and redemptions.
> It'll net the incoming requests to arrive at a net purchase or
> net redemption figure. If it's a net purchase, the fund increases
> its assets by the amount of the purchase and creates and issues
> the appropriate number of shares. If it's a net redemption, the
> fund decreases its assets (or creates a liability) and destroys
> the appropriate number of shares. Since all these transactions
> are at NAV, even though the fund's assets change, NAV remains
> unchanged.
Note that if there are a huge net increase or decrease in
assets, since they try to process that change via cash if
possible, it can slightly affect the fund's portfolio (and
therefore allocation). If a fund is, say, 10% cash and
there are net redemptions which add up to 2% of the
portfolio (that's a huge move in a single day!) after
processing all that, the fund will be only 8% cash.
(well, actually, 8.2% but let's not pick nits). You'll
note in most prospectus that there is a provision where
if certain folks try to redeem too much at once, they
reserve the right to redeem some of it in kind - in
shares of stocks the portfolio held, rather than cash.
> Once this is all done (and it happens instantly), NAV is no longer
> relevant until the close of the next business day. So there's
> nothing to "guarantee".
The NAV is still *right*, though, until trading starts the
next day.
If you have a portfolio with $1million and, say, 100,000
shares outstanding and there's a net purchase of 1000
shares ($10,000), the portfolio is now worth $1,010,000
and there are now 101,000 shares outstanding, each still
worth $10. What effectively happens is that the 100,000
shares which were already outstanding get slightly
diluted - after that transaction, each of those shares
represents a tiny bit more cash than before and a tiny
bit less of the stocks (or whatever!) was already in
there. (And similar for a net redemption - afterwards,
each share represents the same *value* as before - only
it's now a slightly higher proportion stocks and slightly
lower proportion cash).
(in real life, it's a bit more complicated as the portfolio
also deducts expenses daily, prorated at different rates
for different share classes, etc. etc. Plus, it's not
always the case that they can get real quotes for everything
in the portfolio, so some stuff may just get a best guess.
Plus, often, some currency exchange rates need to be factored
in, too)
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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Posted by dumbstruck on January 28, 2008, 7:13 pm
> After the market close, the fund prices and values its portfolio
> and subtracts off any liabilities to arrive at net assets. It
What about funds holding foreign stocks that have closed in earlier
time zones? This used to allow folks to scam the system by trading
funds that used obsolete closing prices of a few hours or even a four
day weekend old. In the meantime before YOUR closing, some news had
arisen that was sure to rock those stocks in a certain direction.
So somehow I think the "fair value" of certain (non-ADR) stocks are
used, which is different than (but connected with?) futures. I wonder
what do they do for stocks in a market to the west which is still
trading at your closing time, or one to the east that closed earlier?
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Posted by TB on January 29, 2008, 1:56 am
dumbstruck wrote:
> What about funds holding foreign stocks that have closed in earlier
> time zones? This used to allow folks to scam the system by trading
> funds that used obsolete closing prices of a few hours or even a four
> day weekend old. In the meantime before YOUR closing, some news had
> arisen that was sure to rock those stocks in a certain direction.
There was a lot of talk about this several years ago, it was one of the
issues in the mutual fund trading scandals. The SEC adopted a new rule
in 2004 which makes this a disclosure item in the fund prospectus --
describing how the fund deals with it. If you google "fair value
pricing" you should find a lot of info.
-Tad
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