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Mutual Fund Valuation

NAV is the value of a mutual fund's assets (securities plus cash net of expenses) at the end
of each trading day divided by the number of shares outstanding.
Unlike stocks, mutual fund transactions are executed in dollar amounts rather than number
of shares, thus there is no penalty for trading in uneven lots.
The price of mutual fund shares is not determined by bidding on the fund shares.
The number of shares outstanding is always equal to the quantity demanded, as new shares
are created to cover any excess of cash inflows and dissolved in proportion to excess cash
outflows.
Thus the per-share price of a mutual fund (its NAV) is not subject to the forces of supply
and demand
and responding to fluctuations in NAVs as if they were driven by supply and demand is
irrational and will lead to dysfunctional investor behavior.
NAV is determined solely by the value of the underlying securities.
Short-term mispricing of the underlying securities can result in over- or undervaluation of
mutual fund shares, but this is not due to bidding on the funds' shares; it is due to bidding on
the securities owned by the fund.
If the value of the underlying securities are in aggregate over- or undervalued, the NAV will
be over- or undervalued in direct proportion to the mispricing of the underlying securities.
For example, technology stocks were overpriced during the Dot-Com boom and that
overpricing was reflected in the NAVs of technology funds.
Rebalancing on a regular basis takes advantage of such mispricing by systematically selling
overvalued shares (selling high) and buying undervalued shares (buying low).

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