Chapter 13 Part 5 Flashcards
The management fee is typically the largest
expense of a mutual fund. The fee may not be based on sales or performance, but rather is based on a percentage of assets under management. Some funds have a so-called fulcrum fee where the percentage is adjusted up or down based on the manager’s ability to outperform a given index. The fee is nonetheless still based on a percentage of assets under management
According to the Investment Company Act of 1940, there arc certain prohibitions with regard to the investment management of a mutual fund. Generally, a fund may not
purchase securities on margin, participate in a joint trading account, or sell securities short, including uncovered options
In order to prevent the theft or loss of a fund’s assets, the Investment Company Act of 1940 requires that the fund
either appoint a qualified bank as its custodian or maintain its assets under a very strict set of rules. Most funds appoint a bank to act as their custodian.
The custodian is responsible for
keeping fund level records, and safeguarding the fund’s cash and securities. The custodian also collects dividend and interest payments from these securities. However, it does not guarantee the fund’s shareholders against investment losses, nor does it sell shares to the public. The fund’s custodian may also be its transfer agent
The fund’s transfer agent performs a number of
of record-keeping functions for the fund, primarily keeping customer level records and providing customer service. It issues new shares and cancels the ones that investors have redeemed. It also distributes capital gains and dividends to the fund’s shareholders, and often takes care of mailing required documents such as statements and annual reports
The sponsor or distributor of the fund is its
principal underwriter. The sponsor assumes the responsibility of selling the fund’s shares to the public. The sponsor has an exclusive agreement with the fund, which allows it to purchase fund shares at the current net asset value. The shares may then be resold to the public at their full offering price, either through outside dealers, which the sponsor recruits, or through the sponsor’s own sales force. A principal underwriter must have a written contract with an investment company that may remain in effect for more than two years if it is approved annually by the board or a majority of the shareholders
The dealer purchases the shares from the
sponsor at a discount from the public offering price in order to fill an investor’s order. Dealers must have a signed selling agreement with the sponsor in order to sell the mutual fund, and must be FINrA members to receive a discount or concession
Dealers are forbidden to purchase mutual fund shares for
inventory, which means they may not purchase shares with the intention of selling them to the public at a later date. Dealers may purchase the shares only to fill customer orders or for their own investment. If a dealer that has purchased shares for investment decides to sell the shares, the dealer must do so by redemption, rather than by sale to an investor
public offering price (POP)
The investor must always pay the full price when buying mntual fund shares. In the case of a traditional front-end load fund, which is one that collects the sales charge from the investor up front, the full price represents the net asset value plus the sales charge (SC).
The net asset value (NAV) of an investment company is determined by
dividing the net assets of the fund (securities valued at the current market price plus cash, minus total liabilities) by the total number of shares outstanding
The net asset value of a mutual fund must be computed at least
once a day, normally as of the close of trading on the New York Stock Exchange. Orders to buy and sell the fund are based on the next price to be computed (forward pricing). For example, if an individual places an orderto purchase fund shares at 2:00 p.m., the purchase price would not be known until the net asset value was computed after the close of business that day
Mutual fund transactions typically settle
the same day, but actual times may vary. Unlike stocks, mutual funds sell ex-dividend whenever the fund or its principal underwriter (sponsor) determines. The ex-dividend date for a mutual fund is usually the same day as the record date
A 12b-1 fee is
an ongoing asset-based sales charge that is deducted from the customer’s account on a quarterly basis. These fees are used to pay the cost of distributing the fund’s shares to the public such as concessions, advertising, and prospectus printing. The maximum 12b-1 fee is an annualized 1% of the fund’s assets and typically ranges between .25% and 1%. Although the specifics for the different classes each fund sells vary widely depending on the fund, most funds offer Class A, B, and C shares
Class A Shares
When buying mutual fund shares with a front-end load (A shares), investors must pay the public offering price, which consists of the NAV plus a sales charge
Class A Shares The sales charge of a mutual fund share is stated as
a percentage of the POP. Under industry rules, the maximum sales charge for a mutual fund is 8.5% of the POP. The sales load (sales charge) percentage is computed by subtracting the net asset value from the public offering price, and then dividing the difference by the public offering price
