Mutual Fund NAV – Deceipt and Mathematics

MutualFund

Millions of mutual fund buyers check their mutual fund nav on a consistent – occasionally daily – basis. For many it is nearly a ritual rite, deciding the current standing of their investments and working out whether or not whether they are still ahead, further behind, or hardly staying even. But are mutual fund nav numbers even accurate?

Obviously, when there are a limited number of holdings, working out the net asset value is much simpler and simpler to do. A mutual fund with a portfolio of 10 or 20 stocks only has to take a look at the end of day price for each stock, see how many shares are held, and do the calculations. Not complicated.

But what about when there are hundreds and hundreds or maybe thousands, of holdings in the mutual fund portfolio? Remember, the mutual fund price is meant to be exactly calculated out on each day based primarily on the value of each holding at the EOB. So the accurate price of each holding – hundreds or thousands of individual investments – must be tabulated and exactingly reported inside of a maddeningly short time period. Each mutual fund has just a few hours to calculate out all these tons of values, total them, and report them by 5 PM each working day.

Here’s where it begins to get interesting, challenging, and presumably perilous for the average mutual fund investor.

First, many individuals don’t understand the bond market is much , much larger than the sector of stocks. However although it is a larger market-place, the reporting isn’t as complex or transparent. How do you sell a bond when they are a portfolio executive? Often you will have a liaison with 1 or 2 bond traders that you’ll call on the telephone and say “Hey, wanna buy some bonds?” They’ll say ‘yes ‘ or ‘no ‘ and then give you the price they are prepared to pay. You can call around and get one or two costs and judge whether you will take one of the offers or whether you’ll just forget selling the bonds (Of course, there are way more electronic methods of achieving this job recently but the method is pretty much the same).

So do you suspect the mutual fund manager has someone call each day to get a specified price on each of hundreds or thousands of bond holdings? Hmmm…

And what about even less liquid holdings like limited partnership shares or stocks in private firms that aren’t traded on any stock exchange? To get a firm price on these holdings you’ve got to have an assessment done which takes a substantial period of time, not to mention cost. Do you believe that mutual fund chiefs are having assessments done on each of their less-liquid holdings every working day? No way.

The biggest deception is the issue of what are referred to as “phantom shares” or shares of stock that don39;t even exist. Everyday on each stock exchange, millions of shares of stock trade that even exist. Difficult to grasp? Yes, but it’s right. Does your mutual fund own any of these ‘created from thin air’ shares? If your mutual fund does, what the heck is the real price?

Put this all together and you might find that owning 1 or 2 gold coins you can hold in your hand or socking money away in the pillow isn’t such a really bad idea after all. You can’t rely only on mutual fund ratings anymore. Your mutual fund nav might not be giving you a precise picture of what your investment is really worth.

To get a better grasp of the correct way to keep a good hold on of your investments and find the best mutual funds without staying in front of the computer monitor or watching the sattelite finance channel all day, read more from Alan Barus on MutualFundNAVx.com and other Internet sites aligned to fiscal stories net.