Net Asset Value (NAV) of a mutual fund is calculated every day. The book suggest

Question

Net Asset Value (NAV) of a mutual fund is calculated every day. The book suggests that a closed-end fund (a fund that has a fixed number of shares) can trade above or below the NAV. So the cost of investing in (or removing your investment from) a mutual fund can be different than the NAV. That seems odd –and yet it is true. Why does this happen and why does it make perfect sense? Also, there are a variety of other options that investors can utilize to obtain the diversification benefits other than mutual funds. As an example, someone could invest in Exchange Traded Funds (ETF) or an investment company such as Berkshire Hathaway. Are these options superior to mutual funds? If so, how? If not, why not?

Explanation / Answer

Cost of investing in a mutual fund can be different than its NAV. The main reason for this is Entry and exit loads. When we purchase shares of a mutual fund, we have to pay entry load and that’s why we end up paying higher than NAV of the fund. When we withdraw money from our, exit load is deducted from the NAV of the fund. That’s why we are end up getting a lower amount for the fund.

These options are not superior. The fund manager of a mutual fund tends to diversify the investment by investing in some proportion and try to balance it. However, we with the same amount of investment cannot diversify much as we have to purchase security in lots and we do not have that much of funds with us. However, investing in ETF can be beneficial as it resembles the index and gives a great amount of diversification but choosing stocks and investing in them can be time consuming and costly.

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