Purchasing Mutual Funds￼￼
Understanding how investors can purchase mutual funds is essential in your role as a dealing representative.
The net asset value per unit (NAVPU) is critical to a mutual fund because it represents the price at which units are bought and sold on any particular day.
The NAVPU is essential for investors because it directly affects how many units their money purchases, or how much cash they receive when they redeem their fund units. Investors may also use the NAVPU to help them calculate the value of their mutual fund investment at any given time and to monitor the performance of their securities.
The investment fund manager has the responsibility of calculating the NAVPU, usually daily. It involves assessing the value of all the fund’s assets and liabilities, as well as the number of shares or units outstanding at the close of business on each valuation day.
Accurate market values for securities are obtained by doing the following:
- Recording the closing price of a security on the financial market where most of its trading activity occurs.
- Setting reliable bids and asking quotations if security is not traded, in accordance with the stated policies of the fund.
- In the case of mortgages, setting a price that reflects the current rates for equivalent mortgages.
All costs are accrued and expensed in accordance with International Financial Reporting Standards (IFRS). The auditor of the fund is required to confirm annually that proper valuation techniques were employed. Mutual funds, like public corporations, must be audited by an independent auditor.
Calculating the Net Asset Value Per Unit (NAVPU)
After assessing the value of all the fund’s assets and liabilities, the fund manager calculates the difference between total assets and total liabilities. This result is known as the fund’s net asset value. The net asset value is then divided by the number of shares or units outstanding to determine the net asset value per unit (NAVPU). The NAVPU is calculated using the following formula:
At the close of trading on Monday, October 4, the fund manager for the Delta Equity Mutual Fund determines that the fund held $11,000,000 worth of securities, $1,400,000 of cash and $400,000 of liabilities. The fund has 1,000,000 units outstanding. As a result, the NAVPU at the close of trading yesterday is $12, calculated as (($11,000,000 + $1,400,000) – $400,000) ÷ 1,000,000.
Valuation Date and Settlement
The valuation date of a mutual fund purchase or redemption is the date following receipt by the fund of a purchase or redemption request. For instance, if a purchase request is received on June 1st at 5 p.m. Eastern time, the valuation date is June 2nd.
Some investors expect the price they receive to be based on the daily fund unit values reported in the press. You need to make your clients aware that there may be a difference between their valuation date and the one published. Requests must be received before 4 p.m. Eastern Time if the investor wants to receive that day’s NAVPU.
The calculation of the NAVPU may be delayed because of an administrative problem or valuing securities in a different time zone. There is no common practice for reporting the NAVPU for funds holding international securities.
Settlement is the date of the actual clearing of the transaction, in essence, the payment of the funds and the delivery of the securities. Nowadays, settlement for most securities is almost exclusively performed on an electronic basis.
For purchases, you have until the settlement date to provide payment. In the case of redemptions, you will not receive your proceeds until the settlement date. Settlement for most funds is the trade date plus three business days, often expressed as T+3. For money market funds, settlement is usually the next business day (or sooner, if chequing privileges are available).
On Monday, October 4, Julie calls a dealing representative at 1:00 pm Eastern Time to make a purchase in the amount of $2,400 for units in the Delta Equity Mutual Fund. The purchase price per unit is the NAVPU of that day, which we had calculated in the previous example as $12 per unit. Assuming no additional transaction costs, Julie will be able to purchase 200 units of the Delta Equity Mutual Fund, calculated as $2,400 ÷ $12. Julie must have the funds available by 12:00 AM Thursday to pay for the units. Since many mutual fund companies process transactions overnight on the date of purchase, funds must be available before the transaction is processed.
Methods of Purchasing Mutual Funds
Methods of Purchasing Mutual Funds
|One of the main advantages of mutual funds is ease of investment. Fund units can be purchased easily on any business day. Mutual funds are available through banks, investment dealers, fund companies, and a variety of other sources.The fund prospectus and Fund Facts document must describe how units can be purchased and how the fund is valued. They must also indicate that the purchase price will be the next NAVPU calculated after receipt of the purchase order. Funds that publish the NAVPU in the press have to ensure that the current NAVPU is provided on a timely basis.There are two common methods for purchasing mutual funds: single lump-sum purchases and regular investment plans.Single lump-sum purchasesA single purchase can generally consist of any lump-sum amount, subject to the minimum purchase requirements established by individual funds.Minimum initial investments range from $500, for most funds, to $150,000. for premium funds. Lower limits often apply to|
purchases for RRSPs and other tax-deferral plans. Once an account has been opened, subsequent purchase requirements are generally much lower.Regular investment plansMany mutual fund sales organizations offer regular investment plans whereby an investor can make regular automatic purchases of mutual fund units. A minimum purchase is generally required and additional contributions can often be made for as little as $25. Minimum amounts vary from fund to fund.
Voluntary Accumulation Plans
With a voluntary accumulation plan, an investor agrees to invest a pre-determined amount on a regular basis (usually weekly,
monthly, or quarterly). The amount of contributions can be changed at any time, and the investor can withdraw from the plan at
To encourage continuing participation, these plans try to make contributing as easy as possible through pre-authorized payments from bank accounts. Acquisition charges are deducted at the time of each contribution. This plan is commonly known as pre-authorized chequing (PAC) plans
Investors with pre-authorized chequing (PAC) plans can take advantage of a risk mitigation strategy called dollar-cost averaging.
With dollar-cost averaging, investors invest the same amount of money in the same mutual fund at regular intervals, such as monthly or quarterly. When unit prices are low, more units are purchased. Consequently, when unit prices are high, fewer units are purchased.
Dollar-cost averaging encourages a disciplined investing approach. After purchasers set the amount and frequency of the plan, payments can be automatically withdrawn from their bank accounts.
Dollar-cost averaging also helps investors avoid the temptation of market timing. Some investors attempt the impossible task of timing the top or the bottom of the market. With dollar-cost averaging, purchases are made on a regular basis despite market conditions.
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