Mutual funds are a type of pooled trust fund that invest in other assets such as stocks and bonds. But stocks and bonds trade all day when the markets are open. A smart investor would be able to take advantage of this by buying or selling shares of a mutual fund that hadn't yet reflected a change in the underlying portfolio, giving them an unfair advantage.
To protect investors from rapid market traders, mutual fund shares only trade once a day. This avoids such situations. At 4:30 p.m., Eastern Standard Time, the value of a mutual fund's underlying positions is added up by accounting firms based upon the closing price of the stock market and other exchanges, and used to determine the value of all the mutual fund's holdings. Any debts or liabilities of the mutual fund, such as shorted stock, is deducted to calculate the net asset value, or NAV, as it is often called. The stock exchanges then update the share price of the mutual fund to reflect this new NAV.
Net asset value, or NAV, is really just the net worth (asset - liabilities) of the mutual fund based upon the closing pieces of the underlying investment the fund owners. It is the price at which investors can buy or sell their shares at the end of each trading day.
Any orders that you place to buy or sell mutual fund shares are aggregated and then settled at 4:30 p.m., EST. So if you sell 1,000 shares of an index fund at 11:32 a.m., you won't actually know the price you are going to receive for those shares, or get your money, until 4:30 that afternoon. This is why you never see the prices of traditional mutual funds trade during the day.
