What it is:
Forward pricing is the SEC-mandated policy of processing buy and sell orders for open-ended mutual fund shares at the net asset value (NAV) as of the next market close (not the most recent market close).
How it works/Example:
For example, let's say you place an order today to buy $100 worth of mutual fund XYZ this morning. Last night, XYZ had a net asset value (NAV) of $10 per share. Your transaction will probably not happen at the NAV price of $10, because the mutual fund company must comply with forward pricing rules.
Because a mutual fund's NAV is recalculated after the market has closed for the day, you will end up buying the shares at the forward price, or the end-of-trading day's NAV price. Assume that after the market closes today, mutual fund XYZ's NAV price is recalculated and the new NAV price is $8. The $100 order that you placed earlier today will end up buying 12.5 shares at $8 per share instead of 10 shares at $10 per share.
Why it matters:
Open-ended mutual fund companies revalue their assets at the end of the trading day. Forward pricing ensures that shares are purchased and sold at price that reflects the changes in fund composition which may have occurred since the previous valuation.