What it means
A mutual fund is valued once a day, normally after the markets close, by adding up the market value of everything it owns, subtracting its liabilities and dividing by the number of units in issue. That figure is the NAV per unit.
Investors buy and sell at the NAV, not at a price that changes throughout the day. Forward pricing means that an order placed during the day will be executed at the next NAV that has not yet been calculated.
If you place an order at 11 a.m., you do not know the price you will receive until the fund is valued that evening. The alternative, historic pricing, used the previous day's NAV and let investors exploit the known gap.
The rule protects existing investors from dilution. Without it, an investor who saw markets surge in the morning could buy at yesterday's lower price, locking in a quick profit at the expense of other holders.
Forward pricing removes that opportunity because nobody knows the price at the time of the order. Cut-off times matter.
Orders received before the fund's cut-off, often the close of the market or a fixed time in the afternoon, are priced at that day's NAV, while orders received after it are priced at the next business day's NAV. Platforms and brokers may set earlier internal cut-off times, so an investor who orders late through an intermediary may be priced a day later than expected.
For finance teams, the main implication is cash-flow timing and reconciliation. The units bought or sold are not known until the NAV is published, so confirmations arrive after the trade date, and money market or treasury teams must allow for settlement a day or more later.
Budgets and forecasts should use an estimated rather than a certain figure for the number of units.
In practice
Real-world examples.
Example
A treasurer at a charity decides at 10 a.m. to invest $200,000 in a money market fund. She places the order before the fund's cut-off, and the order is priced using the NAV calculated that evening. She plans the cash movement for the next day when the units are confirmed.
Example
A retail investor submits a request to sell units in an equity fund at 4:30 p.m., after the cut-off. The order is priced at the next business day's NAV, so a market fall overnight reduces the proceeds. She learns to submit orders earlier in the day.
Example
A fund administrator explains to a new client why historic pricing is not used. The client's staff had hoped to buy at the last known price, but the administrator shows how this would have let informed traders profit at the expense of the other holders.
Formula
Calculation
Units bought = Amount invested / NAV per unit at the next valuation point
NAV per unit = (Total assets - Total liabilities) / Units in issue
Suppose a fund holds assets of $520,000,000 and has liabilities of $20,000,000, with 20,000,000 units in issue. The NAV per unit is (520,000,000 - 20,000,000) / 20,000,000 = $25.00.
An investor who places a $10,000 order before the cut-off receives 10,000 / 25.00 = 400 units. If instead the next NAV had been $25.50 the investor would have received 10,000 / 25.50 = 392.16 units, which shows why the price cannot be known when the order is placed.Case study
Seen in the real world.
Oakridge Capital is a fictional asset manager running a bond fund with 8,000,000 units in issue and a NAV of $12.50 per unit. A corporate client wanted to invest $1,000,000 and asked what price it would get.
The relationship manager explained that the order would be forward priced. If it arrived before the 2 p.m. cut-off, the price would be the NAV calculated that evening, and the client could not be told the number in advance.
In this illustrative example the evening NAV came in at $12.40, so the client received 1,000,000 / 12.40 = 80,645 units, slightly more than the 80,000 units it would have received at the earlier price. The client's finance team learned to treat the unit count as an estimate until the confirmation arrived.
Watch out
Common mistakes.
- Assuming an order placed in the morning will be priced at the previous day's closing NAV, when forward pricing uses the next NAV to be calculated.
- Missing the fund's cut-off time, which can push the order to the next business day and a different price.
- Confusing forward pricing with forward contracts, which are agreements to trade at a fixed future price.
Questions
People also ask.
Why is forward pricing used?
It prevents investors from trading at a price they already know is out of date, which would otherwise dilute the returns of existing holders.
Can I know the exact price when I place an order?
No, the NAV is calculated after the cut-off, so the units you receive are confirmed only after the valuation.
Does forward pricing apply to exchange-traded funds?
Not in the same way, because exchange-traded funds trade on a stock exchange at live market prices throughout the day.
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