Series 7

Packaged Securities - Mutual Fund Management

Mutual Fund Families
Mutual funds also tend to exist in "families". A bond fund, for example, might be sponsored and managed by the same company that runs a growth fund, a money market fund and a global fund. Generally, an investor can sell shares in one fund and reinvest that money in another fund in the same family without triggering a taxable event
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Redemption of Mutual Fund Shares
As with individual stocks, the sale or redemption of mutual fund shares generates taxable gain or loss for the shareholder. The gain from sale or exchange is taxable, even if the fund invested in tax-exempt obligations.

When your client redeems her shares by selling them back to the fund, she does so at the bid price - or NAVPS - which is, as discussed earlier, lower than the offering price. The NAVPS is calculated at the end of the day, so if a client redeems shares at any time before the market close, the client will not know the sale price until the end of the day.

In addition, in order to comply with the Investment Company Act of 1940, mutual fund shares must be redeemed within seven calendar days.


Some funds may charge a redemption fee, or back-end load, depending on their management fee policy.

Management Fees
All mutual funds charge management fees for operating the fund. Some also charge 12b-1 fees for their distribution and service costs. Additionally, funds may also impose sales charges, known as loads, when you purchase or sell fund shares. In this regard, a fund may offer different classes of shares in the same portfolio, with each class having different fees and expenses.


  • Service Costs - For the most part, mutual funds are actively managed. Like most other companies, they have boards of directors that set broad policy and objectives. They generally have a professional team performing the day-to-day task of crafting the portfolio. This role tends to be farmed out to a management company, known in regulatory jargon as an investment advisor, that is compensated with a fee based on the value of assets under management. This fee is usually between 0.5% and 1.0%. The arrangement between the fund and its advisor must come up for renewal every year.

  • Sales Charge - When an investor wants to buy shares of a mutual fund, he or she places an order with a broker-dealer that has a pre-existing selling group memberagreement with the fund. The broker-dealer, acting as a selling group member, buys shares from a middleman known as an underwriter, which in turn buys them from the fund. The underwriter gets a fee of 1% of the public offering price, and the selling group member gets a 7% sales charge.

    You can find out how much each party makes on the deal using some simple math. If the public offering price of a mutual fund share is $100, then the selling group member's 7% sales charge is $7 and the underwriter's 1% fee is $1. That means the fund sells the fund to the underwriter at $92 ($100 minus $8).
Reducing Fees
If you have ever bought or sold a home, the prospect of 8% in commissions can be daunting. It is steep for the highly differentiated and labor-intensive real estate business, so imagine how some mutual fund managers feel about paying such high commissions to a broker-dealer that does little more on the transaction than recommend it to a client, tap a few keys on a keyboard and follow up with some paperwork.

  • Many mutual funds employ their own sales forces and bypass the 7% broker-dealer sales charge. In those cases, the fund sells to the underwriter, which takes its 1% and sells shares directly to the investor.

  • In other cases, the fund eliminates the underwriter - and thus all sales charges - and deals directly with investors; these funds are called no-load funds, and they charge for their management and distribution costs through periodic 12b-1 fees.

  • Most funds have a sales fee and most of those prefer to get paid at the time of purchase; these are called front-end load funds.

  • A few back-end load funds do not require a sales charge up-front, but instead take their commissions when the investor sells his or her shares back within a specified number of years. This tends to be higher the sooner shares are redeemed, and decreases yearly until the specified holding period comes to a close.

  • Breakpoints - Funds and brokerages can and do offer discounts on commissions for trading large blocks of shares of front-end load funds. These usually involve a letter of intent from the client stating he will commit an adequate amount of money to the fund over a specified period of time.

    In return, the client gets a discount on the sales charges. If he commits to $10,000 over the course of a year, for example, his load might drop from 8% to 7%; at $50,000, it might drop to 5%. These dollar-denominated thresholds are called breakpoints.

  • Fundholders can also receive reduced sales charges when the amount held equals a rights of accumulation breakpoint. In this case, the amount of money the client has already invested in the fund - as opposed to the amount he or she intends to invest - determines the sales charges.






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