Mutual fund shares are a continuous public offering as defined by the SEC. All sales must be accompanied by a prospectus. Because of the continuous offering nature of mutual fund shares, a rule called Regulation T prohibits the purchase of mutual fund shares on margin.

An investor can redeem fractions or whole shares of a mutual fund by selling them at the NAV. When will the redemption price be determined? At the same time that the fund company computes the daily NAV for the fund and determines at what price investors purchased shares after the close of trading yesterday or before the close of trading today, or 4pm.

Mutual fund companies must pay the proceeds of the redemption amount to the investor within seven calendar days.


Look Out!
You will need to know the time within which an investment company has to forward the proceeds of the mutual fund redemption to the investor. Do not confuse this time period with stock or bond settlement, and remember: CALENDAR days, not business days like other securities!


Offers of Exchange
Section 11 of the Investment Company Act of 1940 requires offers of exchange to be made at NAV only. This applies to exchanges within a single fund family and to exchanges from one fund family into another. The only exception to this rule is if the terms of the offer have been submitted to and approved by the SEC.

Distribution, Redemption and Repurchase
Section 22 of the Investment Company Act of 1940 requires the following for investment companies:

  • They must determine a method for computing the minimum price at which a member of a securities association may purchase shares.

  • They must prescribe the minimum time period that must pass after the sale or issue of shares before any resale to the investment company by a member or its redemption upon surrender by a member.

  • No investment company can sell any redeemable security it has issued at any price except the public offering price, except to or through a principal underwriter for distribution.

  • A securities association may prohibit its members from purchasing redeemable shares from the issuer except at a price equal to the public offering price minus a commission, spread or discount.


Introduction

Related Articles
  1. Investing

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  2. Financial Advisor

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  3. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  4. Investing

    Why Are ETF Fees Lower Than Mutual Funds?

    Discover all the reasons ETFs typically have lower fees than mutual funds, including their passive management and the absence of load and 12b-1 fees.
  5. Investing

    When To Buy A Mutual Fund

    There is money to be made in mutual funds, but investors fall into several pitfalls that keep them from maximizing their profits. Read these tips to take the uncertainty out of investing in mutual ...
  6. Investing

    An Inside Look At ETF Construction

    Everything you need to know about these versatile and ubiquitous investment vehicles.
  7. Investing

    4 Mistakes to Avoid When Choosing Mutual Funds to Invest in

    Mutual funds are a great way to build wealth but not all of them are the same. Investors have to be mindful of fees, turnover, redundancy and performance.
Frequently Asked Questions
  1. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  2. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
  3. What is the Difference Between a Forward Rate and a Spot Rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ...
  4. What are Some Examples of Stratified Random Sampling?

    Learn what simple random sampling and stratified random sampling are, some examples of stratified random samples, and how ...
Trading Center