I have invested some money into a mutual fund (FTQGX). I've noticed that the price of it is only updated once a day, where as other investment options are updated continuously. Why is this? I'm presuming it has something to do with being a mutual fund, but why are mutual funds like this?
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Mutual funds are collections of investments that other people pay to join. It would be simpler to calculate the value of all these investments at one time each day, and then to deem that any purchases or sales happen at that price. The fund diversifies rather than magnifies risk, looking to hold rather than enjoy a quick turnaround. Nobody really needs hourly updated price information for an investment they intend to hold for decades.
They quote their prices on a daily basis and you take the daily price. This makes sense for a vehicle that is a balanced collection of many different assets, most of which will have varying prices over the course a day. That makes pricing complicated. This primer explains mutual fund pricing and the requirements of the Investment Company Act of 1940, which mandates daily price reporting. It also illustrates the complexity:
How does the fund pricing process work?
Mutual fund pricing is an intensive process that takes place in a short time frame at the end of the day. Generally, a fund’s pricing process begins at the close of the New York Stock Exchange, normally 4 p.m. Eastern time. The fund’s accounting agent, which may be an affiliated entity such as the fund’s adviser, or a third-party servicer such as the fund’s administrator or custodian bank, is usually responsible for calculating the share price. The accounting agent obtains prices for the fund’s securities from pricing services and directly from brokers.
Pricing services collect securities prices from exchanges, brokers, and other sources and then transmit them to the fund’s accounting agent. Fund accounting agents internally validate the prices received by subjecting them to various control procedures. For example, depending on the nature and extent of its holdings, a fund may use one or more pricing services to ensure accuracy.
Note that under Rule 22c-1 forward pricing, fund shareholders receive the next daily price, not the last daily price. Forward pricing makes sense if you want shareholders to get the most accurate sale or purchase price, but not if you want purchasers and sellers to be able to make precise calculations about gains and losses (how can you be precise if the price won't be known until after you buy or sell?).
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Mutual funds are only traded once per day, while other securities can be traded any time during the day.
Mutual funds are actually a collection of other things that have value, such as stocks. The price of a mutual fund is calculated at the end of the day after the market closes by looking at how much the collection of things changed in value during the day.
Ken
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I strongly suggest you go to www.investor.gov as it has excellent information regarding these types of questions.
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.
When you buy shares of a mutual fund you're buying it at NAV, or net asset value. The NAV is the value of the fund’s assets minus its liabilities. SEC rules require funds to calculate the NAV at least once daily.
Different funds may own thousands of different stocks. In order to calculate the NAV, the fund company must value every security it owns. Since each security's valuation is changing throughout the day it's difficult to determine the valuation of the mutual fund except for when the market is closed. Once the market has closed (4pm eastern) and securities are no longer trading, the company must get accurate valuations for every security and perform the valuation calculations and distribute the results to the pricing vendors. This has to be done by 6pm eastern.
This is a difficult and, more importantly, a time consuming process to get it done right once per day. Having worked for several fund companies I can tell you there are many days where companies are getting this done at the very last minute.
When you place a buy or sell order for a mutual fund it doesn't matter what time you placed it as long as you entered it before 4pm ET. Cutoff times may be earlier depending on who you're placing the order with. If companies had to price their funds more frequently, they would undoubtedly raise their fees.
FrankRizzo
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Mutual funds are a collection of other assets, such as stocks, bonds and property.
Unless the fund is a type that is traded on an exchange, you will only be able to buy into the fund by applying for units with the fund manager and sell out by contacting the fund manager.
These type of non-traded funds are usually updated at the end of the day once the closing prices of all the assets in it are known.
Victor
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There is no fundamental, good reason, I think; "that's just how it's done" (which is what all the other answers seem to be saying, w/o coming out and admitting it).
Just guessing, but I'll bet most of the reason is historical: Before up-to-the-moment quotes were readily available, that was a bit tedious to calculate/update the fund's value, so enacted-laws let it be done just once per day. (@NL7 quotes the security act of 1940, which certainly has been updated, but also still might contain the results of crufty rationales, like this.)
There are genuinely different issues between funds and stocks, though:
One share of a fund is fundamentally different from one share of stock: There is a finite supply of Company-X-stock, and people are trading that piece of ownership around, and barter to find an mutually-agreeable-price. But when you buy into a mutual-fund, the mutual-fund "suddenly has more shares" -- it takes your money and uses it to buy shares of the underlying stocks (in a ratio equal to its current holdings). As a consequence:
the mutual fund's price isn't determined by two people bartering and agreeing on a price (like stock); there is exactly one sane way to price a mutual fund, and that's the weighted total of its underlying stock. If you wanted to sell your ownership-of-Mutual-Fund-Z to a friend at 2:34pm, there wouldn't be any bartering, you'd just calculate the value based on the stated-value of the underlying stock at that exact moment.
So: there's no inherent reason you can't instantaneously price a mutual fund. BUT people don't really buy/sell funds to each other -- they go to the fund-manager and essentially make a deposit-or-withdraw. The fund-manager is only required by law to do it once a day (and perhaps even forbidden from doing it more often?), so that's all they do.
[Disclaimer: I know very little about markets and finance. But I recognize answers that are 'just because'.]
not-just-yeti
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I suspect it’s because when the applicable regulations were originally developed we didn’t have the computing power necessary to update pricing in anywhere near real time. The NAV calculating period dictated by regulators just hasn’t caught up, presumably because there’s a profit motiv to incentivize the fund managers keeping it to once a day.
