A:

There are several major factors that make mutual funds attractive investments for many people, one of the major advantages is professional management of the fund’s assets. Which of the following factors is not an advantage to mutual fund purchasers?
a) Automatic reinvestment of dividend income and capital gains distributions with no sales charge.
b) The ability to make a tax-free exchange from one fund to another within a family of mutual funds.
c) Mutual fund shares are considered good collateral for loans.
d) The ability to liquidate a portion of investments while maintaining the original diversification.



The correct answer is b.
While the exchange, or conversion, privilege in a family of mutual funds is certainly an advantage, it is not a tax-free transaction. The Internal Revenue Service considers the exchange to be a sale and a purchase; so the shareholder will realize a gain or a loss.



RELATED FAQS
  1. How can I find tax-exempt mutual funds?

    Learn about finding tax-free mutual funds at major investment firms, including how tax-free funds work and what you should ... Read Answer >>
  2. How often do mutual funds pay capital gains?

    Find out how often mutual funds distribute capital gains income, including the basics of how mutual funds work and why frequent ... Read Answer >>
Related Articles
  1. Investing

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  2. Investing

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
  3. Investing

    Mutual Fund Basics Tutorial

    Learn about the basics - and the pitfalls - of investing in mutual funds.
  4. Financial Advisor

    Mutual Funds: How Many is Too Many? (VTSMX, VBMFX)

    How many mutual funds are too many when it comes to a well diversified portfolio?
  5. Investing

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
  6. 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 ...
RELATED TERMS
  1. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  2. Exchange Privilege

    The opportunity given to mutual fund shareholders to exchange ...
  3. IRS Publication 564: Mutual Fund Distributions

    A document published by the Internal Revenue Service (IRS) that ...
  4. Mutual Fund Custodian

    A trust company, bank or similar financial institution responsible ...
  5. Pooled Funds

    Funds from many individual investors that are aggregated for ...
  6. Forward Pricing

    A Securities and Exchange Commission regulation that requires ...
Hot Definitions
  1. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  2. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  3. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  6. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
Trading Center