Why Cheap Fund Shares May Not Be a Bargain

Unlike with stocks, price is determined by the value of the fund's underlying holdings.

Adam Zoll 07.11.2014
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Question: When considering two mutual funds of comparable quality, does it make sense to go with the one with the cheapest share price?

Answer: Some investors make the mistake of treating a mutual fund's share price the way they would a stock's share price, but they're actually quite different.

A stock's share price represents the market value of one small slice of equity in a company. If the company appears to be growing, demand for its shares may increase because investors expect its earnings (and, thus, its dividends) to grow and/or because they think they will later be able to sell the shares at a higher price. This increased demand for the shares drives the share price higher. If demand decreases--perhaps due to a lousy earnings report or a product recall--its share price is likely to fall.

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Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com

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