Understanding Premium & Discount to Net Asset Value (NAV) in Mutual Funds

The term net asset value is commonly used when referring to mutual funds. With many mutual funds, the net asset value is the price that it costs to purchase a share. However, sometimes you will run across a situation where a fund will be trading at a premium to net asset value. Here are the basics of that situation and what it means.

Trading at a Premium

The term "trading at a premium" means that shares of the mutual fund are actually trading at a price higher than the net asset value. The net asset value deals with the value of the assets in the portfolio and therefore, helps determine what you pay for a typical share of a mutual fund. However, when you deal with closed-end funds, there is a maximum amount of shares available. Therefore, when the maximum is reached and traders still want to get involved, they will be willing to pay more than the net asset value to secure a share. 

The only time that a fund would be trading above or below the net asset value would be when a mutual fund is closed to the public. Otherwise, it always trades at the net asset value at the end of the day.