Last Sunday, this column ran Part 1 of a quiz on things that all mutual-fund shareholders should know. Here is the trickier Part 2 of the...
Last Sunday, this column ran Part 1 of a quiz on things that all mutual-fund shareholders should know. Here is the trickier Part 2 of the quiz.
1. True or false: When a mutual fund changes portfolio managers, it can wait months before notifying shareholders.
2. True or false: Management needs your approval to change the style or investment policies of your fund.
3. Which of these fees is a no-load mutual fund allowed to charge investors?
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(a) termination fee
(b) short-term redemption fee
(c) low-balance fee
(d) management fee
(e) 12b-1 fee
(f) all of the above
4. In a taxable account, you transfer money from the XYZ Growth fund into XYZ Value. You never touch the money. Do you owe capital-gains taxes on profits earned in XYZ Growth?
5. True or false: A mutual fund can continue to use a manager’s superior track record in advertising, even after the manager has left.
Extra credit: Over the most recent five-year period, which of these fund categories had the highest annualized return?
(a) China-region funds
(b) balanced funds
(c) general muni-debt funds
(d) large-cap-value funds
1. True. No rule forces funds to quickly notify you of a change in managers.
Funds need only tell you of the change in the next regular mailing and can bury the news at the back of a semiannual report.
2. False. But there are a few cases where management still needs your OK.
Shareholder approval is required on “fundamental issues” — which sounds like it should include investment policies — but most firms have rewritten prospectuses so that style and policy issues are considered “nonfundamental,” so they can be altered without a vote.
3. (f) “No load” is about sales charges. Fees for closing accounts, quick redemptions, falling below minimum account size or management of the fund have no bearing on the load.
The 12b-1 fee, which is for sales and marketing, is trickier, but so long as it does not exceed 0.25 percent, regulators allow a fund to be described as having no sales loads.
4. Yes. Phone transfers are a sale and a purchase, and the sale is a taxable event, meaning you owe Uncle Sam for any gains realized by selling (or you get the tax benefit from any losses recognized in the trade).
5. True. The manager’s record belongs to both the fund and the manager. That’s why a manager can use his past record to pump up interest in a new fund, while the company running his old fund can continue to tout the results earned during the star manager’s tenure.
Extra-credit question. (c) According to Lipper, general muni-bond funds are up an average of 5.43 percent a year over the past five years.
China funds have gained an annualized average of 3.81 percent, large-value funds 3.09 percent and balanced funds 1.73 percent.
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at email@example.com.