The Stock Market

The Cost of a Share in a Mutual Fund (Excluding Fees)

The Share Price for New Investors

It is important to emphasize that investors always pay fees, which are discussed below. The following explanation is merely provided for the sake of convenience.

Example

A new mutual fund is established, and the manager decides that the fund will issue shares of 1 PV and sell them for $1 each. In the Tulip Fund example, each investor receives one share for every $1 invested. Allan, who invested $100, receives 100 shares.

The par value of each share is $1.

The Tulip fund received $1,000, and issued 1,000 shares.

The fund’s total assets divided by the number of shares issued provides the total assets to share ratio.

The price of a share is set at exactly this value and the price of a share in a fund equals the total value of its assets per share. If the assets of the Tulip Fund total $1,500 at the end of the year, the share price is $1.50 according to the following calculation:

If Mandy bought one share of Tulip for $1 at the beginning of the year, she will earn $0.50 cents by the end of the year. Of course, it is also possible for the fund’s total assets to drop to $800 at the end of the year. The share price will then fall to $0.80. In that case, someone who bought one share will lose $0.20.


Existing
investors

Redemption
of Shares

Total

Asset value
of a share

Tulip Fund’s assets (USD)

$1,800

$150

$1,650

(1,650/1,100=)

$1.5/Share

Number of participating shares

1,200

100

1,100

The Tulip Fund’s share price reached $1.50 by the end of the year.

An investor wanting to buy shares in the fund at that point will have to pay $1.50 per share.

Example:

On December 31, 2008, Ron invests $300 into the fund. He receives 200 shares.

The fund’s share price does not change when new investors join. Current investors neither lose nor gain when new people invest their money. The share price is still $1.50, regardless of the growth of the Tulip Fund’s total assets.

Selling Shares in a Mutual Fund

An investor who bought Tulip shares at the beginning of 2006, but now either needs cash or is disappointed by the fund’s achievements, can choose to sell (redeem) his shares for cash.

Investors choosing to redeem their shares on December 31, 2006 will receive $1.50 per share, which is the same price that new investors must pay. When investors want to redeem their shares, the fund manager sells securities owned by the fund and uses the proceeds to pay them.

Example:

At the end of 2006, Joey decides to buy a coat for $150. He therefore redeems 100 shares at $1.50 per share, and obtains the money he needs.

Here too, the share price remains $1.50.

The Cost of a Share in a Mutual Fund (Excluding Fees)563The Cost of a Share in a Mutual Fund (Excluding Fees)