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CHAPTER 5

of the stock that they don’t see as performing well. They would remain in the stock because the fund is an index fund. Also, the shareholders would lose any type of stock selection they desired. Actively managed funds that focus on a certain sector may be more appropriate for those investors who want to concentrate more in one area, instead of the market as a whole.

Index fund shareholders are also subject to market risk. When the stock market is doing very well, so will the index fund. However, when the market is doing poorly, or the country is experiencing a bear market, the index funds will also perform poorly. This is because the portfolios reflect the indices and will remain invested, whereas other actively managed funds may be holding some of their assets in cash or interest-bearing securities during this down time.

VALUING MUTUAL FUNDS

We’ve discussed net asset value of a mutual fund. But what does this really mean to you, the investor? Net asset value per share is the total value of all the securities and other assets held by the fund, minus any of the fund’s liabilities. This resulting number is then divided by the number of outstanding shares in the mutual fund. The net asset value, or NAV, is the price per share of the mutual fund. Just like individual stocks have a price per share, so do mutual funds. Let’s assume that the XYZ Growth mutual fund has total assets of $52 million. Their liabilities total $14 million, and the fund has 1.4 million shares out- standing. The NAV of the XYZ Growth Fund would be $27.14 per share.

Total fund assets = $52 million Total fund liabilities = $14 million Total shares outstanding = 1.4 million $52 million – $14 million = $38 million

$38 million  = $27.14/share NAV

1.4 million shares

The NAV isn’t always the price per share the investor pays for the mutual fund. Any applicable sales charge (Class A shares only) will

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