Public Offering Price (POP)

The public offering price (POP) is the price per share an investor pays to buy shares of an open-end mutual fund. For a fund with a front-end sales charge, the POP is the fund's net asset value (NAV) per share plus that charge. For a no-load fund, the POP and the NAV are the same. The highest POP, before any discount, is often called the maximum offering price.

The term also appears in other markets. In an initial public offering (IPO) or bond issue, the public offering price is the fixed price at which the underwriters sell new securities to investors. This entry deals with the mutual fund meaning, where the POP is recalculated every business day and is set out in the fund's prospectus.

Think of buying a concert ticket online. The ticket has a face price, and then a booking fee is added at checkout. What you pay is the face price plus the fee. The face price is what the seat is worth; the fee goes to whoever sold it to you.

A fund share works the same way. The NAV is what each share is worth, based on the fund's holdings. The POP is the NAV plus the sales charge that pays the firm that sold the fund. When you sell, you get the NAV back, not the POP, because the fee has already been spent.

Because sales charges are quoted as a percentage of the offering price rather than of NAV, the POP is found by dividing, not by adding a percentage of NAV:

• $\text{NAV}$ is the net asset value per share.
• $s$ is the sales charge written as a decimal, for example 0.05 for 5%.
• $1 - s$ is the share of each dollar paid that is actually invested.

A fund has a NAV of $20.00 and a 5% front-end load. The POP is $20.00 \div 0.95 = 21.05$ dollars, rounded to the cent. Of that $21.05, $20.00 buys fund assets and $1.05 is the sales charge, which is 5% of $21.05. An investor who spends $10,000 at that price buys $10{,}000 \div 21.05 \approx 475.06$ shares, and their holding is immediately worth $475.06 \times 20.00 \approx 9{,}501$ dollars at NAV.

The sales charge can be worked backwards from the two prices:

Using the same numbers, $(21.05 - 20.00) \div 21.05 \approx 0.05$, or 5%.

The POP moves for two reasons. First, NAV changes daily with the market value of the fund's holdings. Second, the rate $s$ falls as the purchase gets larger. Investors who reach a breakpoint, whether through a single large purchase, rights of accumulation (ROA) or a letter of intent, pay a lower POP than the maximum offering price. Shares bought by reinvesting dividends are normally priced at NAV, as are many purchases in retirement plans and fee-based accounts where the load is waived.

The POP only exists for share classes with a front-end load, mainly Class A. Other share classes are bought at NAV and recover distribution costs through a contingent deferred sales charge (CDSC) or a yearly 12b-1 fee instead.

In the United States, Section 22(d) of the Investment Company Act of 1940 requires fund shares to be sold to the public only at the current public offering price described in the prospectus, so a dealer cannot quietly offer one customer a better price than another. SEC Rule 22d-1 allows the scheduled reductions, such as breakpoints, that the prospectus discloses. SEC Rule 22c-1, the forward pricing rule, requires orders to be filled at the next price calculated after the order is received, which for most funds means the NAV struck at the 4:00 p.m. Eastern close. FINRA Rule 2341 caps the sales charge built into the POP at 8.5% of the offering price.

Published returns for loaded funds are usually shown two ways: at NAV, which shows how the portfolio performed, and at the maximum offering price, which shows what an investor who paid the full load actually earned. The 30-day SEC yield is also calculated using the maximum offering price, so for a loaded fund it is slightly lower than a yield based on NAV. The gap between POP and NAV is the reason short holding periods are costly in loaded funds: the investor starts behind and needs a gain equal to $s \div (1 - s)$ just to break even on the total return.

Exchange-traded funds and closed-end funds have no POP in this sense. Their shares trade on an exchange at a market price that can sit at a premium or discount to NAV, and investors pay brokerage commissions rather than a sales load. For mutual fund investors comparing costs, mutual fund loads, the expense ratio and the POP together give the full picture.

• 17 CFR 270.22c-1: Pricing of redeemable securities
• FINRA Rule 2341: Investment Company Securities