Explain the Characteristic and Types of Mutual Fund
Assignment 4
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Explain the characteristic and types of mutual fund
Mutual Fund Characteristic
Potential Depletion of Principal
Mutual funds always involve a certain amount of risk; neither the principal value nor the rate of return is guaranteed in any way. Both the FINRA (previously known as NASD) and SEC rules require that clients receive a disclosure that investment in a mutual fund may fluctuate in value, and that there is a risk of potential depletion of the principal sum invested.
Minimum Initial and Subsequent Investment
Mutual funds must list in the prospectus the required minimum investment that will be accepted by the fund. The minimum initial investment (anywhere from $250 to $10,000 depending on the fund) may be lowered in certain instances, such as for IRA (or other retirement) accounts or for investors who elect a systematic investment plan. The minimum subsequent investment may be set as equal to, or less than, the initial investment limit.
Dividends and Capital Gains Distributions
When opening a mutual fund account, the investor must elect how to receive dividends and capital gains generated by the fund. The options are:
• To receive distributions as cash
• To reinvest distributions into the fund
• To reinvest distributions into a different fund in the same fund family
The investor may choose a different election for the dividends than they do for the capital gains. Regardless of the option selected, distributions have the same tax consequences for the investor (see the section below on taxation). Also, the investor may change the election at any time.
Mutual Fund Taxation
Mutual funds are regulated investment companies under Internal Revenue Code Subchapter M. Under this subchapter, the mutual fund itself does not pay taxes on investment income, dividends and capital gains. Instead, the mutual fund serves as a conduit - or pass-through - to the mutual fund investors.
In order
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Explain the characteristic and types of mutual fund
Mutual Fund Characteristic
Potential Depletion of Principal
Mutual funds always involve a certain amount of risk; neither the principal value nor the rate of return is guaranteed in any way. Both the FINRA (previously known as NASD) and SEC rules require that clients receive a disclosure that investment in a mutual fund may fluctuate in value, and that there is a risk of potential depletion of the principal sum invested.
Minimum Initial and Subsequent Investment
Mutual funds must list in the prospectus the required minimum investment that will be accepted by the fund. The minimum initial investment (anywhere from $250 to $10,000 depending on the fund) may be lowered in certain instances, such as for IRA (or other retirement) accounts or for investors who elect a systematic investment plan. The minimum subsequent investment may be set as equal to, or less than, the initial investment limit.
Dividends and Capital Gains Distributions
When opening a mutual fund account, the investor must elect how to receive dividends and capital gains generated by the fund. The options are:
• To receive distributions as cash
• To reinvest distributions into the fund
• To reinvest distributions into a different fund in the same fund family
The investor may choose a different election for the dividends than they do for the capital gains. Regardless of the option selected, distributions have the same tax consequences for the investor (see the section below on taxation). Also, the investor may change the election at any time.
Mutual Fund Taxation
Mutual funds are regulated investment companies under Internal Revenue Code Subchapter M. Under this subchapter, the mutual fund itself does not pay taxes on investment income, dividends and capital gains. Instead, the mutual fund serves as a conduit - or pass-through - to the mutual fund investors.
In order