Question 1

When comparing which mutual fund to invest in, which of the following would be important to consider?

Accepted Answer

All three factors (load, net asset value, and expense ratio) are important to consider when comparing mutual funds. The load is a sales charge that the investor must pay when buying or selling shares of the fund, while the net asset value represents the value of each share of the fund's portfolio. The expense ratio is the annual fee charged by the fund for managing the investments. These factors can impact the overall return on investment for the investor, making it important to consider all three when choosing a mutual fund to invest in.

Question 2

Which of the following are passed on to fund share holders through 12b-1 fees?

Accepted Answer

12b-1 fees are used to pay for advertising and promotional expenses of mutual funds. Commission fees are not included in 12b-1 fees and are separately paid to brokers or financial advisors who sell the mutual fund.

Question 3

A mutual fund's expense ratio compares the fund's expenses to its total assets.

Accepted Answer

A mutual fund's expense ratio is calculated by dividing the fund's expenses by its total assets. This gives investors an idea of how much they will be paying in fees and expenses to invest in the fund. Generally, a lower expense ratio is better, as it means more of the investor's money is being invested in the actual assets of the fund.

Question 4

Net asset value is determined by taking the total market value of all the securities held by the mutual fund, subtracting out any liabilities, and dividing the result by the number of shares outstanding.

Accepted Answer

Net asset value (NAV) is calculated using the formula mentioned in the statement.

Question 5

A mutual fund that does not charge a commission to own its shares is called a ________.

Accepted Answer

A no-load fund does not charge a commission to own its shares, making it an attractive option for investors looking to minimize fees and expenses. A free issue fund, market fund, no-charge fund, and free-load fund are not commonly used terms in the mutual fund industry.

Question 6

Mutual funds charge high sales loads because their potential returns are much higher than the returns for individual stocks.

Accepted Answer

Mutual fund sales loads are charged for the distribution and marketing of the fund, not necessarily because the potential returns are higher than individual stocks. In fact, the potential returns for mutual funds are not guaranteed and can vary depending on the fund's investment strategy and performance.

Question 7

Mutual fund fees and expenses will negatively affect the return you receive on your investment.

Accepted Answer

Mutual fund fees and expenses, such as management fees and sales charges, can reduce the return an investor receives on their investment. It is important to be aware of these fees and choose low-cost funds to maximize investment returns.

Question 8

When you own shares of a mutual fund, you can choose to have the dividend and capital gains distributions paid directly to you in the form of cash or you can choose to have them reinvested into additional shares of the fund itself.

Accepted Answer

When you own shares of a mutual fund, you have the option to choose between receiving dividend and capital gains distributions in cash or reinvesting them into additional shares of the fund.

Question 9

Total returns on mutual funds can be calculated by adding dividends distributed, capital gains distributed, and ________ and dividing this sum by the beginning NAV.

Accepted Answer

The calculation of total returns on mutual funds involves adding the dividends distributed, capital gains distributed, and any change in the NAV (net asset value) of the fund. Since the beginning NAV is used as a reference point, the change in NAV is represented by the difference between the ending and beginning NAV. Therefore, the correct formula for calculating total returns is: (dividends distributed + capital gains distributed + (ending NAV - beginning NAV)) / beginning NAV. Hence, option B is the correct choice as it represents the change in NAV that needs to be included in the calculation.

Question 10

All distributions from a mutual fund, whether paid out or reinvested, are taxable in the year in which they occur.

Accepted Answer

Distributions from mutual funds are generally taxable in the year in which they occur, regardless of whether they are paid out to the investor or reinvested in the fund. However, some types of mutual fund distributions, such as those from municipal bond funds, may be tax-free at the federal level. It is important for investors to consult with a tax professional to understand the tax implications of investing in mutual funds.

Question 11

Back-end load mutual funds charge a commission when the investor sells the mutual fund.

Accepted Answer

Back-end load mutual funds, also known as deferred load funds, often charge a commission when the investor sells the mutual fund, usually within a certain time frame (e.g. 5-10 years). This commission is known as a contingent deferred sales charge (CDSC) and is typically a percentage of the amount redeemed.

Question 12

Which of the following statements is true regarding mutual fund load charges?

Accepted Answer

Studies have shown that there is no consistent evidence that load funds, which charge a fee for buying or selling, perform better than no-load funds, which do not charge such fees. Performance is more dependent on the fund's management and investment strategy rather than the presence of a load charge.

Question 13

Tabitha is just beginning to develop her financial portfolio. She does not want to pay commissions to purchase shares in mutual funds, as her friend you would advise her to invest her dollars in ________ funds.

Accepted Answer

No-load funds are mutual funds that do not charge any commission or sales fee when buying or selling shares. This means that Tabitha can invest her dollars in no-load funds without having to pay any additional fees, allowing her investment to grow at a faster rate.

Question 14

What is the total return for a mutual fund with the following characteristics?
Beginning NAV = $55.82
Ending NAV = $70.52
Dividends distributed = $2.25
Capital gains distributed = $3.50

Accepted Answer

The answer of What is the total return for a...

Question 15

Sometimes, when you purchase shares directly from the mutual fund company itself, there will not be a sales load.

Accepted Answer

When you purchase shares directly from the mutual fund company itself, there will not be a sales load. However, if you go through a broker or financial advisor, they may charge a sales load or commission for their services.

Question 16

The ________ is the value of the mutual fund's holdings, minus any debt, divided by the number of shares outstanding.

Accepted Answer

The net asset value (NAV) is the value of the mutual fund's assets (holdings) minus any debt, divided by the total number of shares outstanding. This gives the NAV per share, which represents the fund's net worth per share. It is a commonly used measure to value mutual funds and is often reported in financial publications.

Question 17

Explain what the three 'classes' of a mutual fund shares are all about.

Accepted Answer

The answer of Explain what the three 'classes' of a...

Question 18

"Classes" of mutual funds have different fee arrangements attached to them.

Accepted Answer

Different classes of mutual funds have different fee arrangements, which may include different expense ratios, sales loads, and distribution fees. These fees can impact the overall return of the fund, so it's important for investors to understand the fee structure before choosing a particular class of mutual fund.

Question 19

Explain how sales loads and fund expenses can negatively impact your return on investment in a mutual fund.

Accepted Answer

The answer of Explain how sales loads and fund expenses...

Question 20

Which of the following will affect your capital gains liability?

Accepted Answer

Only turnover ratio and changes in net asset value will affect your capital gains liability. The turnover ratio measures the frequency with which a mutual fund buys and sells assets in its portfolio. Higher turnover ratios lead to more capital gains distributions and can result in a greater tax liability for investors. Changes in net asset value can also trigger capital gains taxes when shares are sold. The expense ratio, on the other hand, represents the fees charged by the mutual fund company and does not directly impact capital gains liability.

Quiz 15: Mutual Funds: An Easy Way to Diversify