Fund net assets

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mushyyy
Posts: 48
Joined: Tue Jan 13, 2015 1:34 pm

Fund net assets

Post by mushyyy » Mon Jan 22, 2018 12:06 pm

Newbie question:

Let’s assume a fund has 100 shares, priced 10$ each, for a total value of 1000$.

If someone sells a share, someone has to buy it.
But funds normally grow the number of shares outstanding.

But where do they take the money to create new shares, if for a net buyer there is always a net seller?

It seems that sometime, net buyer money is used to create new shares, instead of a counterpart for a seller

TheAncientOne
Posts: 140
Joined: Wed Jul 19, 2017 8:53 pm

Re: Fund net assets

Post by TheAncientOne » Mon Jan 22, 2018 12:21 pm

Mutual fund shares are different from shares in a company. Every day after the market closes, the fund's accountants calculate the value of the fund's net assets and divide by the number of shares outstanding that day to report a net asset value per share. If you redeem shares today, the number of shares outstanding will decline. This will not affect net asset value per share as you will be receiving cash equal to that number. This is why all funds, even index funds must maintain a portion of their assets in cash in order to honor requests for redemption.

alex_686
Posts: 3935
Joined: Mon Feb 09, 2015 2:39 pm

Re: Fund net assets

Post by alex_686 » Mon Jan 22, 2018 12:33 pm

There is a difference between "Open ended" mutual funds and "closed ended".

Closed ended funds work as you suggest. They trade like normal stocks. Everyday they post their NAV and you can compare their traded price verse their NAV price. These types of funds are becoming rarer.

Open ended funds, which includes ETFs, create and destroy shares as needed to handle cash flows. Mutual funds do most of their purchases and redemptions at the NAV. So you don't need a net balance between buyers and sellers. In your example, lets say there is a net buyer of $100. The NAV is now $1,100 - $1,000 in net assets plus $100 in cash. The fund creates 10 new shares at the $10 NAV price so now there are 110 shares.

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