As a former fund accountant who has processed thousands of NAV calculations, I can explain exactly how mutual funds determine your per-share redemption price – a process governed by strict SEC regulations that ensures fairness to all investors.
Table of Contents
The Official Calculation Method
Net Asset Value (NAV) Formula
NAV\ per\ Share = \frac{Total\ Assets - Total\ Liabilities}{Outstanding\ Shares}Components Breakdown:
- Total Assets = Market value of all securities + cash
- Total Liabilities = Accrued expenses + payables
- Outstanding Shares = All investor shares issued
Example Calculation:
- $500M in securities
- $10M cash
- $2M liabilities
- 20M shares outstanding
- NAV = ($500M + $10M – $2M) / 20M = $25.40 per share
SEC Rule 22c-1 Requirements
Pricing Timeline
- Cutoff Time: 4:00 PM ET (most funds)
- Pricing Frequency: Daily
- Effective Time: Next business day’s NAV
Critical Detail: All orders received before cutoff get that day’s NAV; after cutoff get next day’s NAV.
Valuation Process Steps
- Security Pricing (3:30-4:00 PM)
- Exchange-traded: Last sale price
- Illiquid bonds: Matrix pricing
- Foreign securities: Fair value adjustment
- Accruals Calculation
- Daily expenses
- Dividend receivables
- Interest income
- Share Reconciliation
- Confirm share balances
- Process creation/redemption orders
What’s Included in NAV
| Included | Excluded |
|---|---|
| Market value of holdings | Front-end loads |
| Accrued dividends | Back-end loads |
| Interest receivable | Shareholder fees |
| Cash equivalents | Transaction fees |
Special Valuation Scenarios
Fair Value Pricing (SEC Rule 2a-5)
When normal market quotes aren’t reliable:
- After-hours events (earnings, M&A)
- Foreign market closures
- Illiquid securities
Example: A U.S. fund holding London stocks adjusts for post-close UK news.
Bond Fund Specifics
- Amortized cost (money market funds)
- Yield-to-worst calculations
- Credit spread adjustments
Redemption Price vs. NAV
While NAV is the baseline, your actual redemption price may differ by:
- Redemption Fees
- Up to 2% for short-term trading
- Disclosed in prospectus
- Back-End Loads
- Declining charges (e.g., 5% in Year 1 to 0% in Year 6)
- Wire/Exchange Fees
- Typically $5-$25 per transaction
How Fund Accounting Works
Daily NAV Process Timeline
| Time | Activity |
|---|---|
| 3:30 PM | Start pricing domestic securities |
| 3:55 PM | Finalize foreign security valuations |
| 4:00 PM | Order cutoff |
| 4:15 PM | Preliminary NAV calculation |
| 5:30 PM | Final NAV released |
Funds have until 5:30 PM to correct errors
Investor Implications
- Market Timing Risk
- You’re always selling at unknown NAV
- Cash Drag Effect
- Redemptions may force untimely security sales
- Tax Efficiency
- In-kind redemptions available for large accounts (>$250k)
Verifying Your Redemption
Always check:
- Trade confirmation shows correct NAV date
- Account statement matches expected proceeds
- Fund website archives historical NAVs
Pro Tip: Redemptions after large market drops may realize losses that could have recovered.
The Bottom Line
Mutual fund redemption pricing follows an exacting, regulated process designed to treat all shareholders equally. As I advise clients: “You’re not just selling shares – you’re selling a slice of the entire portfolio at its precise daily valuation.” Understanding this mechanism helps investors avoid costly timing mistakes and sets proper expectations about when sale proceeds will be available.
