CHAPTER 16: Mutual Fund Fees and Services Flashcards
Mutual Funds Incur two types of fees:
Sales Charge (sales commissions) - Charges to investors when they buy or sell mutual fund shares.
Management Fees
- charged out as expenses against the entire fund’s earnings
- 0.5% - 3% net assets per year
Front-end Load, Back-end Load / deferred sales charge, no-load funds
Front-End Load
- Fee upon purchase
Back-End Load / Deferred sales charge
- Fee paid upon redemption
No Load Funds
- no fees paid
- navpu/navps
MER is a combination of what
Management fees & Operating expenses
MER
- deducted from the funds returns
- 0.5% - 3% net assets per year
- more active fund (equity) will charge a higher fee than a more passive fund (money market)
Front-end Load percentage calculations
Initial Investment
($1,000 investment x 4% FEL = $40)
($40 / $960 = 4.17% actually paid)
Net Asset Value Per Share
($12 NAVPS / 100% - 4% FEL = 12.50)
($12.50 x 4% = $0.50)
($0.50 /$12.50 = 4.17%)
Acquisition Price
- Sales Charges/ Loads will be found in the prospectus
- Investors can negotiate lower charges
Offering price & Load on Investment
5% sales charge
$33.00 NAVPU
Offering Price
$33.00 / 0.95 = $34.74
Load on Investment
$34.74 - $33.00 = $1.74
$1.74/$33.00 = 5.27%
Redemption Price
no-load fund
- NAVPU/ NAVPS
Back-end load / Deferred sales charge
- NAVPU x (1 - load%)
If investor sells funds at a Higher NAVPS than when bought
- NAVPS current - (NAVPS previous x Load%)
NAVPS at the time of redemption
- NAVPS - (NAVPS x Load%)
Fees of the Fund
Paid By the Fund
- Management Fees
- Operating expenses
Paid by the Investment Company
- Trailer Commission / Trailer Fees
- -is paid to mutual fund salesrepresentatives to service existing clients
- 0.25% - 1% per year
Fees Paid by the client
Transfer Fees
- investor wants to switch find investments, no load fees wont charge, fund with fees may charge up to 2%
Frequent Trading Charge
- Discourage clients in redeeming their units too soon.
Account Set-up Fees
- one time fee for first time investors
- funds with sales charges generally do not have this fee
Trustee fee
- clients who hold mutual funds in registered plans
- $20 - $100 annually
Account Closing fees
- Levy a charge when accounts close
- waived if closed because of death
Explicit Costs
Disclosed Paid by investor
Management fees
Operation expenses
Sales charges
Management fees + Operation expenses = MER
Implicit costs (trading costs)
Not disclosed to investor
Brokerage Fee
- directly related to turnover rate
- Higher trading turnover will typically harm the fund’s performance due to the increased operating costs caused by higher trading volumes, so these costs are capitalized
Accumulation Plans & Voluntary Accumulation Plans
Accumulation Plan
- to assist clients in making periodic purchases of units of a particular fund
- in prospectus it will be shown as (Pre-authorized investment plans)
Voluntary Accumulation Plan
-allow clients to specify the amount and timing of periodic payments they are willing to make
Dollar Cost Averaging (accumulation plan)
- provides structure through a disciplined approach
- removes the need that many clients have to be able to time the market
- invests on a regular basis (monthly)
- more balanced approach
Systematic withdrawal plans (5)
For periodic income, fund pays out part of the capital invested + distributions over a period of time
Fixed dollar withdrawal
-suitable for clients who look for their mutual funds for income
Ratio withdrawal
- fixed percentage
- suitable for clients who supplement their income from other sources
Fixed period withdrawal
- Withdraw money for a period of time until the investment is fully paid out
- suitable for client who have been saving for a major purchase
Life withdrawal
- withdrawals from the expectancy time of lifetime of client
Annuities
- contract with individual and life insurance company
- gives certain amount of money to insurance company
- insurance company makes regular payments to individual
