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.


RELATED FAQS

  1. How much of a company's stock can a mutual fund own?

    There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors ...
  2. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ...
  3. 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 ...
  4. Do mutual fund companies pay taxes?

    Learn how mutual funds are incorporated as regulated investment companies and are exempt from paying taxes under certain ...
  5. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ...
  6. 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 ...
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. Fund Supermarkets

    An investment firm or brokerage that offers investors a wide ...
  4. Family Of Funds

    A group of mutual funds offered by one investment or fund company. ...
  5. Mutual Fund Yield

    Dividend payments divided by the value of a mutual fund’s shares. ...
  6. Exchange-Traded Mutual Funds

    Investopedia explains the definition of exchange-traded mutual ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center