Investing Mutual Funds
Forward Pricing
James Chen
James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media.
Katrina Munichiello
Fact checked by Katrina Munichiello
Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications. In 2011, she became editor of World Tea News, a weekly newsletter for the U.S. tea trade. In 2013, she was hired as senior editor to assist in the transformation of Tea Magazine from a small quarterly publication to a nationally distributed monthly magazine. Katrina also served as a copy editor at Cloth, Paper, Scissors and as a proofreader for Applewood Books. Since 2015 she has worked as a fact-checker for America's Test Kitchen's Cook's Illustrated and Cook's Country magazines. She has published articles in The Boston Globe, Yankee Magazine, and more. In 2011, she published her first book, A Tea Reader: Living Life One Cup at a Time (Tuttle). Before working as an editor, she earned a Master of Public Health degree in health services and worked in non-profit administration.
Mutual Fund Essentials
What Is Forward Pricing?
Forward pricing is an industry standard for mutual funds developed by the Securities and Exchange Commission (SEC) that requires investment companies to price fund transactions according to the day's end net asset value (NAV), also known as the forward price. Rule 22(c)(1) provides the basis for this pricing and is known as the forward pricing rule. Forward pricing helps to mitigate shareholder dilution and provides for more efficient mutual fund operations.
Forward pricing is a convention used by mutual funds to price fund shares based on the end of each day's net asset value (NAV).
NAV computes the total market value of the investments held by the fund less fund liabilities and expenses.
Forward pricing has been established by SEC Rule 22(c)(1), and it's intended to lessen the effects of share dilution and also to standardize fund pricing across the industry.
Understanding Forward Pricing
Forward pricing is the standard methodology for which open-end mutual funds are transacted. Forward pricing primarily refers to open-end mutual funds which are not traded on an exchange with real-time pricing. Open-end mutual funds are bought and sold from the mutual fund company. Investors can buy them through intermediaries such as financial advisors, brokers, and discount brokerage platforms.
Rule 22(c)(1) of the Investment Advisors Act of 1940 requires that mutual funds be transacted at their forward price. Mutual funds price their shares once per day after the close of the market. The closing price is called the net asset value (NAV). The per-share NAV is equal to the total market value of assets minus the mutual fund's liabilities divided by the number of shares outstanding. All underlying securities are recorded at their daily closing market value.
Investors requesting transactions will trade at the mutual fund's next forward price. The forward pricing rule requires that transactions be based on forward prices for the greatest efficiency. Thus, forward pricing requires mutual fund accounting to take careful consideration for the timing of fund transactions. Mutual funds transacted during the trading day will receive the end of day NAV as their transaction price. Mutual funds transacted after the market's close will receive the next day's forward price. With forward pricing, a mutual fund transaction cannot take place at a previous NAV. Its price can only be based on a value determined after receipt of an order.
The SEC instituted Rule 22(c)(1) to mitigate the risk of shareholder dilution that can occur from backward pricing methods. The SEC has also added swing pricing mechanisms for daily NAV calculations which went into effect in November 2018. Swing pricing detailed in Section 22(c)(1) under provisions (a)(3) allow mutual fund companies to marginally account for transactions costs of the fund in order to better manage the fund's liquidity risks. Companies must establish swing pricing policies that are detailed in a fund's prospectus.
U.S. Securities and Exchange Commission. "Net Asset Value." Accessed April 28, 2021.
U.S. Securities and Exchange Commission. "Investment Company Swing Pricing." Accessed April 28, 2021.
Open-End Management Company
An open-end management company is a type of investment company responsible for the management of open-end funds.
Discount to Net Asset Value Definition
A discount to net asset value is a pricing situation that occurs when a fund's market trading price is lower than its net asset value (NAV).
Premium to Net Asset Value
Premium to net asset value (NAV) presents when the value of an exchange-traded investment fund is at a premium to its daily reported accounting NAV.
What Is a Management Investment Company?
A management investment company is a type of investment company that manages publicly issued fund shares. Discover more about them here.
Net Asset Value – NAV
Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the number of shares outstanding, and is used as a standard valuation measure.
What Is Breaking the Buck?
Breaking the buck occurs when the net asset value (NAV) of a money market fund falls below $1.
When Are Mutual Fund Orders Executed?
Why It's Important to Know When Mutual Funds Update Their Prices
Mutual Fund vs. ETF: What's the Difference?
Open Your Eyes To Closed-End Funds
ETF Essentials
Mutual Funds vs. ETFs: What's the Difference?
ETF Trading Strategy & Education
Dissecting Leveraged ETF Returns