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Mutual Funds and Investment Companies

This chapter is the largest piece of the Series 6. It is about packaged products: you and many other people pool money, and a professional manager buys a basket of stocks or bonds for the group.

Open-end vs closed-end

An open-end fund (the usual mutual fund) issues new shares when you buy and cancels shares when you sell. The price you pay is net asset value (NAV) plus any sales charge. NAV is the fund's assets minus liabilities, divided by shares outstanding. It is calculated once each business day after the market closes.

A closed-end fund raises money once, lists a fixed number of shares on an exchange, and then those shares trade like a stock during the day. The market price can sit above or below NAV.

Sales charges and share classes

  • Class A: a front-end sales load when you buy. Large purchases can hit breakpoints that cut the load. Rights of accumulation and letters of intent can also lower the charge.
  • Class B: no front-end load. A contingent deferred sales charge (CDSC) if you sell early, plus an ongoing 12b-1 marketing fee. Shares often convert to Class A after enough years.
  • Class C: a level load — a higher ongoing 12b-1 and usually a short CDSC.

A 12b-1 fee is an annual marketing fee taken from fund assets. It is not a one-time ticket price; it is a small leak every year.

Prospectus and SAI

The prospectus is the legal booklet that must be offered before or at sale. It states objectives, fees, risks, and how to buy and sell. The statement of additional information (SAI) is extra legal detail available on request. Think of the prospectus as the owner's manual and the SAI as the full technical appendix.

Investment Company Act of 1940

This federal law is the rulebook for mutual funds, closed-end funds, and UITs. It requires a board, limits how much the fund can borrow, and forces clear disclosure of fees and holdings.

Key terms

  • NAV: per-share value of the fund after the close.
  • Breakpoint: a purchase size that lowers the Class A sales charge.
  • 12b-1 fee: annual marketing fee inside the fund.