Final answer:
Forward pricing in mutual funds means that the price for buying or selling shares is calculated at the end of the trading day, ensuring fairness for all investors. It accounts for the day's accumulated orders, based on the fund's net asset value.
Step-by-step explanation:
The term forward pricing refers to the process by which the value of a mutual fund's shares is calculated and applied to buy and sell orders.
For mutual funds, the price at which shares are bought or sold is not determined the moment an investor places an order.
Instead, orders are accumulated throughout the trading day and are executed at the next available calculated value of the fund's net asset value (NAV), which happens after the markets close.
Therefore, all transactions requested during the day are processed at this price, ensuring a fair and equitable system for all investors.
Mutual funds offer several advantages for investors, such as liquidity, the ease of converting assets to cash, and professional management by experts who handle the funds, saving investors time and effort.
Additionally, mutual funds allow for diversified portfolios, lowering risk and potentially improving returns, although they may come with higher costs.
Regarding the valuation, an investor must consider potential capital gains and dividends when determining what to pay in the present for future benefits.
In summary, forward pricing ensures that all investors pay or receive the same price for shares of a mutual fund, reflecting all information available up to the close of the market.
This is key in managing investments and expectations about future profits.