Q:

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.

A:

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.


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