Forward Pricing in Mutual Funds: A Clear Explanation

An open-end mutual fund must use forward pricing on buy and sell orders received throughout the day. Forward pricing estimates the Net Asset Value (NAV) that will be used when the order is fulfilled. This may sound complicated, but the reason for forward pricing can be easily understood.

Net Asset Value

Mutual funds trade at the value of the sum of the value of their holdings, divided by the total number of shares outstanding in the fund. Therefore, the price per share is the net asset value of the fund. Open-end mutual funds can trade during the day, but the NAV of the fund on that day is not calculated until the end of the day. This could present a problem for those who bought or sold shares according to the prior NAV recorded the previous day.

Forward Pricing

Forward pricing is calculated using a complicated formula, but you do not need to know or use the formula to use the forward price. All open-end mutual funds are required to list the forward price during the day. This means you will be automatically quoted the forward price, and that price will be the one used to execute the buy or sell order you initiated that day.