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SEC Issues Guidance on Mutual Funds for Individual Investors

September 14, 2016 Blog

In August, the Securities and Exchange Commission (SEC) issued an Investor Bulletin advising individual investors on the various fees associated with different types of mutual funds, as well as some additional considerations for those considering mutual fund investments. Our attorneys summarize this Investor Bulleting below.

For more information on some of the costs and risks associated with investing in mutual funds, you can review the SEC’s prior Investor Bulletin: Mutual Fund Fees and Expenses.

Understanding Mutual Fund “Classes” and Fees

A mutual fund is a type of investment in which the fund manager invests in a diversified portfolio of securities (such as company stocks), and then individual investors purchase shares in the fund. By investing in professionally-managed mutual funds instead of individual stocks, investors can often reduce their risk of substantial investment losses. This protection comes from the fund’s diversification; but, as you might expect, it also comes at a price.

In order to make informed investment decisions, it is critical to understand the fees associated with mutual fund investments. These fees will vary depending on the “class” of mutual fund share you choose to purchase (typically Class A, Class B, Class C or Class I), and your broker or investment advisor should clearly explain these fees to you before you buy into a fund.

Some of the most common mutual fund fees include the following:

  • Front-End Sales Load Fee – An up-front fee that is required in order to purchase shares in the fund, most common with Class A shares.
  • 12b-1 Fee – An annual fee that can vary in amount depending on the class of shares purchased.
  • Contingent Deferred Sales Load Fee – A fee paid when investors redeem their shares in the fund. With certain funds, these fees will decrease to zero over time.

However, it is important to note that these may not be the only fees associated with a particular mutual fund investment. Mutual funds frequently have additional costs, such as advisory fees, brokerage fees, marketing fees, and costs for professional services required by the fund.

Factors to Consider When Purchasing Shares in a Mutual Fund

Before purchasing any class of shares in a mutual fund, there are several issues individual investors should consider. The SEC recommends the following:

  • Assess your financial position, and consider whether it makes sense to invest at a certain level in order to reduce your fees.
  • Consider your time horizon. How long do you plan (and how long are you able) to hold your shares?
  • Make sure you fully understand the entire fee structure associated with your chosen class of shares.

In addition, our attorneys recommend that individual investors research their brokers and educate themselves on the risks of mutual fund fraud before making any investment decisions. To learn more, we encourage you to read:

Have You Suffered Sudden and Unexpected Losses in a Mutual Fund Investment? Contact a Financial Fraud Lawyer at Zamansky LLC

If you have suffered sudden and unexpected losses in a mutual fund investment, or if you are concerned that you may have fallen victim to an investment fraud scam, contact Zamansky LLC for a free consultation. To speak with an attorney in confidence, call (212) 742-1414 or request an appointment online today.