Don’t be shy, ask ii...how are funds priced?

No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii. Email your questions to: ask@ii.co.uk

Steven Mathew asks: on the face of it, open-ended funds are very simplistic but it's what goes on below the surface that is unclear to me, thus I have a number of questions for you about the mechanics of open-ended funds. Do fund managers use the value of all their underlying assets at 12 noon to price shares? Does pricing vary among managers? How are US-focused funds priced? Why do accumulation funds have an ex-dividend date?

Dzmitry Lipski (pictured above), Head of Funds Research, interactive investor, says: The price of a fund is equal to the underlying value of all the assets minus any outstanding liabilities – this is called the net asset value, or NAV. When the value of the securities in the fund goes up, the NAV goes up, and when the value of the securities in the fund goes down, the NAV goes down.

NAV is used to set the price at which investors can buy or sell a fund. Calculating the NAV depends on the assets held by the fund. For example, for funds holding shares or bonds, prices are taken from stock and bond markets. The NAVs are calculated by the fund’s administrators to make sure that the valuation process is robust and independent.

• Discover more Don't be shy, ask ii questions here
• Open an ISA with interactive investor. Click here to find out how.

Valuation cut-off times vary from fund to fund, but for many funds in the UK the valuation point is 12pm, so you need to place your order by 11am to get that day's valuation. This gives enough time to place the order with a fund custodian and ensure it is submitted for that day’s valuation point. Orders placed after this time would not be traded until the next dealing day. This means that you will not know the exact price that you will buy or sell at when you place the deal. This is especially true when markets are volatile.

If an order is placed too late for that day’s valuation point (VP), orders are submitted for the next day’s VP. This can make funds look slower to price back than they are. There can also be a delay receiving details of the fund pricing either from the fund manager or the fund custodian. Delays are not due to fund managers trying to sell shares to fund redemptions.

Settlement is the point at which cash is actually paid, or received, in exchange for investments. The settlement period for funds takes three, four or five days following the trade. This can be referred to as T+3, or trade date plus three business days, T+4 or T+5. However, it can in some circumstances be as quick as T+1.

With accumulation, or Acc funds, where dividends arise on underlying assets, the income is automatically reinvested and reflected in the price of the shares. Accumulation funds still have an ex-dividend date, signifying the date of reinvestment of dividends. Most funds have an Acc and an income, or Inc class. Income gets paid out some time after the ex-dividend date. The Acc version either stays the same or is reinvested. It would also assist with the production of consolidated tax certificates to confirm in which tax year the underlying income was technically received.

• Accumulation vs income funds: which is better?
• Subscribe to the ii YouTube channel for our latest interviews
• Want to learn more about the world of investing? Visit our Knowledge Centre

For pricing of funds investing in US and other overseas markets, each fund’s prospectus will explain how their individual fund is valued.

When exactly inflows to a fund are deployed by the manager will vary, depending on the manager and the type of fund you’re investing in. There will typically be requirements set up by the mandate they run. Much, if not all of it, will be deployed quickly into existing holdings, rather than be used to open new positions. However, the process may take longer if the fund is invested in less liquid assets, perhaps small-cap stocks. A manager may also wish to build cash levels for strategic purposes, until an attractive opportunity presents itself, although most prefer not to hold large amounts of cash as a percentage of the fund’s NAV.

In terms of sterling hedged funds - how the hedging is done and to what percentage level of accuracy a fund aims to hedge, this is something that requires direct consultation with the individual fund and may not be something a fund will disclose publicly.