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All about Mutual Funds

Core Facts

Monday, March 13, 2017

If you don’t know about mutual funds, you might be inclined to run for the hills when you hear the term. But understanding mutual funds is essential if you have any interest in investing your money.

To put it as simply as possible: A mutual fund is a collection of investments managed by someone else on your behalf, for a fee.

Let’s put it this way. If you gave your friend $100 to buy you some items from a department store during a sale you couldn't make, they would purchase the best products possible for you, and they would also take a portion of that $100 to buy themselves a new tee shirt. That’s only fair.

To put it in more specific terms: A mutual fund is a collection or group of stocks, bonds, or some combination of the two.

In certain ways, mutual funds have revolutionized the way investors are able to participate in the markets by giving them the ability to pool their monies together in order to invest the way the very wealthy have done for years

There are certain key characteristics of mutual funds:

Mutual Fund Diversification – Most individual investors are unable to purchase 50 or 60 different issues of stocks. They typically have to rely on a few selections, and hope for the best. An investor in a mutual fund gets the advantage of being invested in the entire fund’s portfolio. This helps lower the exposure to problems with any individual issue.

Mutual Fund Professional Management – The fund employs professionals to manage the fund's investments. Most small investors can’t possibly spend their days researching individual stocks or bonds and market trends. By owning a fund, investors can take advantage of the abilities of the fund’s management team. The fund charges a fee to cover the cost of management.

Mutual Fund Affordability – Investments in mutual funds can often be opened with small investments. Sometimes the initial investment may be as low as $100, and subsequent investments into the fund may be made with similar small amounts.

Mutual Fund Liquidity - Mutual funds are liquid on every business day. They are sold at their net asset value which is computed on every business day after the close of the markets. The price you receive depends on the value of the securities in the fund.

There are different classes of mutual fund shares:

Mutual Fund Class A shares: These usually impose a front-end sales load and no (or a low) ongoing fee to pay for sales and marketing expenses (Rule 12b-1 fees). Usually the front-end sales load will decrease at certain breakpoints depending on certain criteria set up by the fund.

Mutual Fund Class B shares: These normally charge a contingent deferred sales charge (CDSC) when the shares are sold. Typically, they would charge a relatively high 12b-1 or other asset-based fees.

Mutual Fund Class C shares: Usually there is no front or back-end load or a small back-end load but would charge higher 12b-1 or other asset-based fees.

Mutual Fund Breakpoints:

Mutual funds often offer an investor in Class A shares a discount on the price when certain investment amounts have been reached. For example, a fund that carried a 5.25% sales charge may reduce that charge to 4.75% on investments of $100,000 or more. Information on breakpoints is usually found in the fund’s prospectus, statement of additional information, and on the fund’s website.

One way to reach a breakpoint is through Rights of Accumulation. In this case, the investor receives the quantity discount on all investments above a predetermined amount.

A second method is to sign a Letter of Intent. Typically, the fund will reduce the current sales charge based on the investor’s agreement to purchase enough additional shares to qualify for the lower, upfront fee over the next 13 months. LOIs can usually be backdated for three months to capture previous investments. If the investor does not fulfill the agreement, his account would be adjusted to reflect the appropriate sales charge.

The third way to qualify for a breakpoint is, of course, to invest enough funds at the initial purchase to attain the breakpoint level.

Mutual Fund Returns

There are two important measures of a fund’s performance which should not be confused. The first is current yield which measures the return a fund’s dividend or interest is giving. The second is total return which measures the overall return of the fund over a given time period. Investors should examine current yield when available, and always look at a fund’s total return to get the overall view of a fund’s performance.

Learn more at: https://www.davidlerner.com/the-classroom/learn-about-mutual-funds


Mutual funds are offered by prospectus. Investors should read the prospectuses carefully and consider the investment objectives, risks, charges, expenses and other information before investing. Mutual fund prospectuses are available through the company offering the fund.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.

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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Lawrenceville, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: www.davidlerner.com

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Jake Mendlinger
Account Manager
516.829.8374 X 232

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