How to Determine Mutual Fund Pricing

How to Determine Mutual Fund Pricing
Reviewed by Somer Anderson

Investing prudently means not only buying low and selling high but also understanding the costs that come with different financial products. Many investors funnel their savings into mutual funds through 401(k)s and other retirement accounts without fully grasping the fees involved or the significant impact these can have over time. This can lead to unexpected losses or a choice of funds not aligned with your needs. Hence, when looking at mutual funds, it’s crucial to understand how their fees work so they aren’t silently chipping away more than they should from your nest egg.

We’ll show you which fees to scrutinize and compare fees across different funds, identify ways to cut costs, and then discuss the trade-offs when opting for lower fees. Armed with this knowledge, you’ll be better equipped to choose mutual funds that align with your long-term financial goals.

Key Takeaways

  • The most common method for determining a mutual fund’s price is as a percentage of its net asset value (NAV).
  • NAV is the value of the fund’s assets, less its liabilities.
  • The NAV is updated once a day, usually after the markets close.
  • The expense ratio is calculated as a percentage of the NAV.
  • Other costs to watch for include load, purchase, and exchange fees.
  • If you buy or sell shares of a mutual fund, your trade will be executed at the next available NAV.

What Are the Costs of a Mutual Fund?

Many investors are drawn to the stock market but find selecting individual stocks or securities daunting. Mutual funds have long been a great option for those who want to grow their money over the long term but want to leave the investment decisions to others. Most of those with a 401(k) plan from their employer are using a mutual fund. These funds are professionally managed and pool money from many investors to buy and hold a diverse portfolio of stocks, bonds, and other assets. They are convenient since you can put money into them right from your paycheck—often with a certain percentage matched by your employer—without needing to choose specific investments yourself.

How to Determine Mutual Fund Pricing


The Mutual Fund Expense Ratio

However, this convenience comes at a price. The firms that run these funds have their own costs: portfolio management, fund administration, pricing, shareholder services, and distribution. There are also salaries for the fund manager. These expenses are totaled, and you are charged for them as a percentage of your money with the fund. This is the expense ratio. This can be found on most brokerage platforms. The costs behind it are broken down in the fund’s prospectus, which must give more detail at length where the costs come from.

Because your expense ratio fees are taken out of the fund’s assets, you are charged indirectly; it’s not like you cut a monthly check. Thus, you can easily miss how much you are, in fact, being charged.

The fund’s board of directors is expected to scrutinize its operations on behalf of its shareholders. They are responsible for the advisory contract between the fund and its investment adviser, which largely determines the management fees. This contract also includes the expense ratio.

The expense ratio covers the following:

  • Management fees: These are paid out of the fund’s assets and go directly to the advisor to manage the fund’s portfolio. The cost depends greatly on the size and complexity of the fund’s assets—the more management needed, the higher the price.
  • 12b-1 fees: Named after the U.S. Securities and Exchange Commission (SEC) rule that permits them, these are used for marketing and distribution expenses. They might also cover some shareholder service costs.

Other Mutual Fund Fees

Additional fees you might see include these, which aren’t covered by the expense ratio:

  • Account fees: These may be charged to maintain smaller accounts with balances below a set minimum.
  • Exchange fees: A fund might charge you if you exchange one fund for another within the same fund family.
  • Loads: These sales commissions can be charged when you buy (front-end load) or sell (back-end load) your stake. Funds used to trumpet in ads when they offered so-called “no-load” funds. That’s no longer a major advantage. In 2023, 91% of mutual funds didn’t charge these commissions.
  • Purchase fees: Like front-end loads, purchase fees are paid when buying shares but are not considered a broker commission or counted as part of the load.
  • Redemption fees: Some mutual funds charge you when you sell your shares within a short period (usually 30 to 180 days), which the SEC limits to 2% of your investment. This fee is designed to discourage short-term trading in these funds for stability.
  • Trading costs: The fund accumulates these buying and selling securities for its portfolio. While they aren’t charged to you, they affect the fund’s overall performance.

The Generational Decline in Mutual Fund Fees

The good news is that mutual fund fees have decreased over time, dropping by about 60% across the board since the mid-1990s. Below, we see in the chart a drop in fees for mutual funds concentrated in different types of securities: equities, bonds, or both (hybrid).

Fees for other types of mutual funds have also fallen. Target-date funds have fallen significantly from an asset-weighted average fee of 0.67 in 2008 to 0.32 in 2023. The most popular funds among those choosing mutual funds for 401(k) plans, these are actively managed to change their portfolio to become more conservative as you near retirement.

Another popular choice, index mutual funds, have also had their fees cut, from an asset-weighted average of 0.27 and 0.20 in 1996 for equity and bond index funds, respectively, to 0.05 for both in 2023.

While these figures can help you assess which funds’ fees you find excessive, you will pay more for funds that require more strategic administration. For example, growth equity funds, which seek out undervalued assets and thus require the research needed to find them, had an asset-weighted average expense ratio of 0.63 compared with the expense fee average for all equity mutual funds in 2023, 0.44. In this case, if the fund matches your strategy and your risk profile, the cost might be worth it.

Here, you can see the overall trends in mutual fund fees since 1996.


Why Mutual Fund Fees Have Fallen

The mutual fund industry has significantly lowered its fees in recent years. This results from increased competition, regulatory changes, and growing investor demand for lower-cost financial products. Let’s review these in turn:

  • Changes to investing: In the 1980s, when mutual funds started becoming the investment vehicle of choice for many, relatively few had the expertise or wherewithal to trade on Wall Street. Today, there’s an entirely different financial environment. As investors have become more educated and cost-conscious, there has been a growing demand for lower-cost options fueled by low-cost index funds and ETFs, making it easier for investors to access broad market exposure at a fraction of the cost of actively managed funds. Retail investors’ knowledge of their mutual fund choices used to be often limited to the pamphlets their employer gave them. Today, anyone with an internet connection can compare the fees charged by mutual funds and their competitors.
  • Increased competition: The mutual fund industry now competes for investors against other major players. The rise of passively managed index funds and ETFs has challenged actively managed mutual funds, forcing them to justify their higher fees or cut them to stay competitive. Mutual funds with passive management approaches have also cut costs to keep their funds attractive to investors.
  • Regulatory changes: The SEC has introduced reforms over the years to increase transparency and protect investor interests. For example, the regulator has repeatedly refined how mutual fund fees present their fees to potential investors. This has included 2022 reforms to use more plain language and a clearer table of fees for retail investors. These changes have made it easier for investors to compare fees across different funds, which has pressured fund companies to keep their costs in check.
  • Technology and economies of scale: Automated trading systems, improvements in data analytics, and streamlined back-office operations have helped fund companies cut their operating costs. In addition, as mutual fund assets have grown, many fund companies have achieved economies of scale, which has also helped cut expenses. The lower their costs, the lower the expense ratio you pay.

Net Asset Value (NAV)

Since the expense ratio is a percentage calculated against the NAV, that’s where we’ll need to go next. The NAV is the value of an investment fund’s assets minus its liabilities (any money it owes).

Putting money into a mutual fund means buying a stake in it, so how much is relevant to your holdings in the fund has to be broken down. The NAV per share (NAVPS) is the value of each unit in the fund, calculated by dividing the total NAV by the number of shares outstanding. You multiply the expense ratio by the number of shares in the mutual fund you hold, then multiply that by the NAVPS. This gives you the amount you paid for the fund manager’s expenses in a given period.

NAV Calculation Example

This is easier to see with an example. Suppose the value of a fund’s investments is $94 million, and the fund also holds $5.9 million in cash and cash equivalents and $100,000 in accrued income. Adding these together gives total assets of about $100 million.

However, the fund has liabilities to account for, including loans and bills. Let’s say it has $15 million in both short- and long-term liabilities, plus daily operating expenses amounting to $15,000. (We only take away a day’s operating expenses since the NAV is recalculated each day.) Subtracting this total of $15.015 million in liabilities from the $100 million in assets results in a net asset value (NAV) of $84.985 million.

To determine the value of each share or unit, assume the fund has 7 million investable units. Dividing the NAV of $84.985 million by 7 million units gives an NAVPS of about $12.14. This figure represents the going price of each tradable stake in the fund.

Example With Expense Ratio

Suppose you hold 1,000 units or shares in the mutual fund above, where each share’s NAV $12.14. With an expense ratio of 1.0%, you can determine the annual cost to you for the mutual fund, even if you don’t pay it directly.

First, you multiply 1,000 by 12.14, to get the value of your shares, $12,140. Next you multiply that figure by the 1% expense ratio, giving you a cost of $121.40 per year.

This cost includes management fees, administrative fees, and other operational expenses covered by the expense ratio. It is subtracted from the fund’s assets, reducing the NAVPS slightly by the end of the year.


The fund’s accounting agent is usually responsible for calculating the NAV.

Daily Pricing

Mutual funds calculate their NAV each business day, usually after the market closes. A fund’s portfolio consists of various securities fluctuating in price throughout trading hours. When the assets in the fund’s portfolio rise in value, the NAV increases, and vice versa. At the end of each day, mutual funds must supply a value for their investment portfolios based on the current market price of their securities.

However, there are times when an alternative method is needed, for example, if market prices are unavailable or considered unreliable. This can happen when security prices are highly volatile. The fund could then price its securities at fair value when calculating the NAV.

Using fair value, the fund’s directors give their best estimate of how much the securities in question could reasonably be sold for at the time. Since this is less objective, it’s only to be used in specific circumstances so that the fund’s holdings are transparent to investors.


When you buy or sell shares in a mutual fund, you won’t know the exact price until the NAV is calculated at the end of the trading day, usually posted at 6 p.m. ET. For the time being, you only know the estimated cost, which comes from the NAV the previous day.

How To Cut Your Mutual Fund Fees

Mutual fund fee percentages can appear quite low, but their cumulative impact over time can take a substantial chunk out of your retirement funds. Now that you’re savvier about where these fees come from, you can consider how to minimize these costs and keep more of your hard-earned money invested for your future.

First, let’s illustrate the difference higher or lower fees can make. Suppose two investors start with $100,000 in a mutual fund and plan to invest in their target-date fund for 30 years. Both funds end up with annual returns of 7% in that time, but they have different fees.

  • Fund A has an expense ratio of 0.5%
  • Fund B’s expense ratio is 1.5%

The lower fee for someone with Fund A means more money remains invested and compounds over time. Assuming the expense ratio is the only difference, Fund A would grow to about $661,437. The higher fee significantly reduces the amount available for compounding for the investor with Fund B. After 30 years, the investor in Fund B has shares valued at $498,395. The difference of 1% in fees produces a $163,042 difference in what each has for their retirement.

With this in mind, here are some ways investors can cut their fees:

  • Avoid loads: Choosing “no-load” funds bypasses having to pay for sales commissions. Many brokers offer no-load funds, giving you plenty of fee-free options. However, the fees might have migrated elsewhere, so review the expense ratios and 12b-1 fees.
  • Automatic investing: Many funds reduce fees for those who enroll in automatic investment plans. These plans also help with dollar-cost averaging (saving the same amount at set times no matter how the market is doing), which can further improve your returns over time.
  • DIY: If you’re comfortable doing your own research, discount brokerage platforms offer a vast selection of low-cost mutual funds and ETFs. This way, you’ll gain more control and minimize fees. However, there will be less hand-holding than you’d get from full-service brokers or investment managers, whom you can usually access through your job’s mutual fund companies.
  • ETFs: These are like mutual funds but are traded like stocks. They often have lower expense ratios, trade throughout the day like shares, and are more tax-efficient than mutual funds.
  • Index funds: These track the performance of a market index, like the S&P 500. Their passive management style means lower operating costs, translating to lower expense ratios, with an asset-weighted average of 0.05% in 2023. This gives you instant diversification across a market. However, you can’t beat the market—only try to match it.

How Are Mutual Funds and ETFs Different?

Both are investment funds but differ in how they are traded and managed. Mutual funds are bought and sold once at the end of the trading day based on their NAV and can be actively or passively managed. ETFs, meanwhile, trade like stocks throughout the day when the markets are open and often have lower fees. Like mutual funds, ETFs cover many different investment strategies and assets.

How Do Mutual Funds Distribute Their Dividends?

Mutual funds collect income through dividends and interest from the securities they hold in their portfolios. These earnings are then distributed to their own shareholders as dividend payments. Investors can receive these distributions as cash or reinvest them to buy more shares of the fund. If you do receive them, you’ll have to pay taxes on that income and will lose the compounding effects of the distribution being added to your stake in the mutual fund.

Why Are Mutual Funds Popular For Retirement Savings?

There are several reasons. First, they offer access to a broad portfolio of stocks, bonds, and other securities, which helps to spread risk and mitigate against losses in volatile markets. This diversification is crucial for long-term investment strategies like retirement savings, which aim to grow wealth steadily over time. In addition, mutual funds are professionally managed, which takes the burden of choosing assets from the investor. Mutual funds also fit well into various tax-advantaged retirement accounts, such as 401(k)s and individual retirement accounts, where investors put in funds straight from their paycheck or other automated deposits.

The Bottom Line

Fees are an inevitable part of investing in mutual funds. However, over the past few decades, the trend has been toward lower fees, driven by increased investor awareness and the rising popularity of low-cost financial products like index funds. This shift makes access to these diversified investment portfolios more affordable. By staying informed and strategically selecting funds with lower expense ratios and minimal additional costs for the type of investments you want, you can help ensure that more of your savings are going toward your future, not that of the fund manager.

Read the original article on Investopedia.