What Is a Floating NAV?
In case if you are wondering whether mutual funds are right for you, you should read about why mutual funds, in general, should be a part of your portfolio.
Why Floating NAV Was Instituted
Regulators, worried that money market fund activity could contribute to financial instability, passed a set of reforms that would make fund providers float the NAV in order to more accurately reflect the value of the portfolio, allow providers to temporarily prohibit investors from withdrawing their balances and impose transaction fees on redemptions.
Check out our Money Market Fund section to keep up to date with this section of mutual fund industry.
Types of Funds Affected by Floating NAV Policy
Retail and U.S. government money market funds will be allowed to maintain the stable $1 per share policy. Accounts held in these funds will be substantially unaffected by the floating NAV rule.
Get a list of money market funds to know more about them.
Stable NAV vs. Floating NAV – Key Changes
The other major change has to do with trading restrictions and fees. Funds will have the ability to charge redemption fees of up to 2% and freeze redemptions for up to 10 business days in order to prevent rapid selling.
Potential Problems With Floating NAV
- Many big financial companies use money market funds as a cash management tool. If the NAV fluctuates, it becomes less of a cash-like instrument and could push companies to look elsewhere to fill this need.
- Floating NAVs could also cause tax headaches since investors would need to potentially account for capital gains and losses.
- Money market fund providers would need to improve legal disclosures, leading to heavier regulatory burdens.
- In situations where fund companies would need to implement fair value pricing, high volatility could make the process difficult. In these times, volatility could lead to the latest available prices becoming stale very quickly. Much work may need to be done to keep pricing current.
The Bottom Line
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