Mutual Fund Policies
- Mutual funds offer different types of shares known as classes of shares. People who buy A shares pay an upfront commission, whereas investors who buy B shares only pay a commission if they sell their shares within seven years of buying them. C shares have no upfront fee, but people pay a 1 percent fee for selling them within a year of buying them. No-load shares have no commission fees attached. Mutual fund directors decide which share classes to offer. Some funds offer several share classes, while others only sell one type of share.
- Policies relating to mutual fund fees are of crucial importance. Funds must generate enough income from fees to cover expenses and turn a profit but not charge so much that they price investors out of the market. Commission fees for A and B shares range from 3 to 6 percent. No-load funds appear to cost less but have higher annual distribution fees known as 12b-1 fees. Additionally, many no-load funds have "buy" and "sell" fees. Policy decisions on fees can make or break a fund.
- Investment firms must detail fund strategies in prospectuses. Fund strategies explain the goal of the fund and provide shareholders with information on the types of securities held within the fund. A mutual fund company cannot deviate from its stated fund policy without notifying investors. If a fund prospectus stated the fund contained long-term bonds and was designed to create income, but then allowed the fund manager to buy nothing but stocks, it would be committing a securities violation.
- Mutual funds that sell A shares have policies related to breakpoints. Shareholders pay reduced commissions when they reach breakpoints, which are certain dollar amounts of shares as specified in the fund prospectus. Each mutual fund creates its own policies for breakpoints. People can reach breakpoints by aggregating the combined amount of their investments in several mutual funds run by one investment firm. Mutual fund companies determine which funds are related for breakpoint purposes.
