Mutual Fund Operations
Understanding how to purchase, redeem, and manage mutual fund investments is essential for the Series 6 exam and for helping clients manage their investments effectively.
Purchasing Mutual Fund Shares
Methods of Purchase
- Direct from Fund Company — Through the fund's website or phone
- Through a Broker-Dealer — Full-service or discount broker
- Through a Financial Adviser — Investment adviser or financial planner
- Through Retirement Plans — 401(k), IRA, etc.
Minimum Investments
Most mutual funds have minimum initial investments:
- Regular accounts: $1,000 - $3,000 typical
- Retirement accounts (IRA): Often lower minimums
- Subsequent investments: Often $50 - $100 minimum
Redeeming (Selling) Shares
Redemption Process
- Submit redemption request to fund or broker
- Request must be received before 4:00 PM ET for same-day pricing
- Settlement is typically T+1 (one business day after trade)
- Proceeds sent within 7 days (SEC requirement)
Payment Methods
- Check mailed to investor
- Electronic transfer to bank account
- Wire transfer (may have fee)
Redemption Fees
Some funds charge redemption fees (separate from CDSC) to discourage short-term trading:
- Typically 1-2% if sold within 30-90 days
- Designed to protect long-term shareholders
- Different from back-end loads
Exchange Privileges
Most fund families allow exchanges between funds at NAV:
- No sales charge on exchange (if load already paid)
- Must exchange for same share class
- Taxable event — Triggers capital gains/losses
- May be limited (e.g., 4-6 exchanges per year)
Example
Moving from ABC Growth Fund to ABC Bond Fund within the same family:
- No new sales charge
- But: May owe taxes on gains from the growth fund
Systematic Investment Plans
Dollar Cost Averaging
Dollar cost averaging involves investing a fixed dollar amount at regular intervals:
- Invest same amount regardless of price
- Buy more shares when prices are low
- Buy fewer shares when prices are high
- Reduces impact of market volatility
Example: $500 Monthly Investment
| Month | NAV | Shares Purchased |
|---|---|---|
| January | $25 | 20 shares |
| February | $20 | 25 shares |
| March | $25 | 20 shares |
| April | $50 | 10 shares |
| Total | — | 75 shares for $2,000 |
Average cost per share: $2,000 ÷ 75 = $26.67 Average NAV: ($25 + $20 + $25 + $50) ÷ 4 = $30.00
The investor's average cost ($26.67) is lower than the average NAV ($30.00).
Systematic Withdrawal Plans
Systematic withdrawal plans provide regular payments to investors:
Types of Withdrawal Plans
| Type | Description |
|---|---|
| Fixed-Dollar | Same dollar amount each period |
| Fixed-Share | Same number of shares each period |
| Fixed-Percentage | Percentage of account value |
| Fixed-Time | Liquidate entire account over set period |
Warning: Withdrawing more than the account earns will deplete principal.
Dividend and Capital Gain Options
Investors can choose how to receive distributions:
- Cash Payment — Receive check or deposit
- Reinvestment — Buy additional shares (most common)
- Direct to Another Fund — Reinvest in different fund in family
Automatic Reinvestment Benefits
- Purchases made at NAV (no sales charge)
- Compounds returns over time
- Convenient and automatic
- Still taxable in year received (in taxable accounts)
Settlement
Mutual fund transactions settle T+1 (one business day):
- Trade Monday → Settle Tuesday
- Trade Friday → Settle Monday
Prospectus Delivery Reminder
The prospectus must be delivered at or before the time of sale for all mutual fund purchases.
An investor uses dollar cost averaging to invest $300 monthly in a mutual fund. In Month 1 the NAV is $30, and in Month 2 the NAV is $15. How many total shares did the investor purchase?
When an investor exchanges from one mutual fund to another within the same fund family, which of the following is TRUE?
What is the standard settlement period for mutual fund transactions?
2.7 Unit Investment Trusts (UITs)
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