A GUIDE TO MUTUAL FUND INVESTING

 

 

For many investors, mutual funds offer an attractive option to help in reaching financial goals.  City Securities Corporation wants to ensure you are investing in the mutual funds and the share classes that best suit your investment objectives, risk tolerance, time horizon and diversification needs.  This guide will help you better understand the costs and discounts associated with the various mutual fund share classes that are available to you, as well as how your Investment Consultant and City Securities Corporation are compensated when you invest in mutual funds through our firm.

 

As always, if you have any questions about your mutual fund investments, please contact your Financial Advisor.

 

What is a Mutual Fund?

 

A mutual fund pools investments from many investors in a single portfolio under professional management.  To help manage risk, the portfolio manager diversifies the fund’s investments according to the fund’s investment objective.  Funds can invest in a variety of investments which may include U.S. or international stocks, bonds, money market instruments or any combination of these.  Individual investors own shares of the fund, while the fund or investment company owns the underlying investments chosen by the manager.

 

Since the first U.S. mutual fund appeared in 1924, investors have entrusted mutual funds with savings for homes, education, retirement and other major financial goals.  Today, some 8,000 mutual funds hold approximately $7 trillion in assets for approximately half of all American households.

 

Before investing in any mutual fund, you should discuss your investment goals and objectives with your Financial Advisor and read the fund’s prospectus carefully.  The prospectus contains important information, including the risks, fees and expenses associated with the particular fund.

 

What are the Costs of Investing in Mutual Funds?

 

All mutual funds have costs associated with their sale and operation.  It is important to understand these costs because they affect the return on your investment.  A fund’s prospectus includes a fee table which details the charges you pay when you purchase or redeem shares in a mutual fund.  They include sales charges and annual operating expenses.  You can pay these charges in a variety of ways depending on the share class you choose.

 

Sales Charges

 

These charges, sometimes called loads, provide compensation for the fund company, City Securities Corporation and your Financial Advisor.  Most sales charges are either front-end (charged when you buy shares) or back-end (charged when you sell shares).  A back-end charge is also called a contingent deferred sales charge or CDSC because, as you hold shares subject to a back-end charge for longer periods of time, the charge declines – ultimately to zero.

 

Operating Expenses

 

Many of the costs associated with running a mutual fund are ongoing administrative and operating expenses or, simply, the cost of doing business.  Included in fund operating expenses are management fees, payable to the fund’s investment advisor, and distribution fees (sometimes called service or 12b-1 fees), payable to the fund’s distributor.  Operating expenses are not paid directly by mutual fund holders in the form of a fee; they are deducted from the fund’s assets so they reduce investment returns.  A fund’s prospectus will specify the fund’s expense ratio, often expressed as a percentage of the fund’s net assets, which can help you compare annual expenses between various funds.

 

What Types of Mutual Fund Investments are Available?

 

Each share class represents a similar amount of ownership in a mutual fund but each has different fees and expenses which result in different performance.  While there are many different classes of mutual fund shares, the most common are Class A, Class B and Class C shares.  The different share classes were created to meet varying investor preferences.

 

Class A Shares

 

Class A shares typically impose a front-end sales charge (or load) deducted from your initial investment.  The fund’s operating expenses are generally lower for A shares than for B or C shares.  The front-end charge is imposed when you purchase the shares and immediately reduces the dollar amount of your initial investment.

 

Most funds offer “breakpoint” discounts for large investments – so as the size of your overall investment within a fund family increases, the sales charge decreases.  There are a number of ways you may obtain a breakpoint discount:

 

  • When your investment equals or exceeds a specified breakpoint.

 

  • The fund may offer Rights of Accumulation (ROA).  This allows you to qualify for a breakpoint by combining your own prior purchases of the mutual fund and those of certain related parties (such as your spouse or minor children), including shares you hold directly or at another brokerage firm.

 

  • The fund may allow you to count future purchases toward meeting a breakpoint by using a Letter of Intent (LOI).  By signing a Letter of Intent, you indicate your intent to buy a certain amount of shares over a particular period of time, usually 13 months.  Additionally, some funds offer a retroactive Letter of Intent that allows you to rely upon purchases in the recent past to qualify for a breakpoint discount.

 

Each fund’s rules about breakpoints, rights of accumulation and letters of intent differ.  Before investing, it is important to ask your Financial Advisor about all the discounts available to you within your fund family of choice.

 

Class B Shares

 

Class B shares typically do not carry a front-end sales charge (or load), but they may impose higher annual operating expenses than A shares.  Also, B shares normally impose a back-end load, or contingent deferred sales charge (CDSC), which you pay if you sell your shares within a specific number of years and which reduces your net proceeds.  The CDSC is generally reduced each year and is usually eliminated after the seventh or eighth year.  At that point, many fund companies convert the Class B shares to Class A shares. 

 

Class C Shares

 

Class C shares typically do not carry a front-end sales charge and generally impose a lower CDSC than B shares, often one percent for one year from the date of purchase.  Like B shares, C shares normally impose higher annual operating expenses than A shares but, unlike B shares, they typically do not convert to A shares.  If you buy a C share, you generally pay as you go – meaning, the sales charge is applied annually to the expense ratio.  Investors who want flexibility and who have a shorter investment time horizon may find that C shares best meet their needs.

 

Many mutual funds also allow you to exchange Class A, Class B and Class C shares in one fund for shares (usually of the same class) of other funds in the same fund family.  In these cases, the mutual fund usually waives any front-end sales charge or deferred sales charge.  The details of a given fund’s exchange rights are set forth in the fund’s prospectus.

 

To compare expenses by share class, you may wish to review the Financial Industry Regulatory Authority’s (FINRA) Mutual Fund and ETF Expense Analyzer which can be found at: http://apps.finra.org/investor_Information/ea/1/mfetf.aspx.

 

Fee-Based Accounts

 

You can also buy mutual funds through fee-based accounts.  Instead of paying a sales charge, you pay an annual fee based on a percentage of the account’s value.  This type of account offers either no load funds or Class A or similar shares where the sales charge is waived.  You should speak with your Financial Advisor to determine whether this is an appropriate option for you.

 

 

 

 

 

What’s Right for You?

 

As you have read, selecting the appropriate mutual funds and share classes for your investment portfolio involves a number of important factors including the fund’s investment objective, performance history, risks, fees and expenses.  You should review the prospectus of any mutual fund you are considering purchasing to fully evaluate your options.  You should also speak with your Financial Advisor so that, together, you can make the choices that are most suitable for you.

 

What Compensation is Paid to City Securities Corporation and Your Financial Advisor When You Invest in Mutual Funds?

 

For our role in providing you investment advice and assistance in your purchase of a mutual fund, City Securities Corporation and your Financial Advisor are paid in ways that vary with the type of fund and the share class purchased as well as the amount invested.

 

  • As mentioned previously, City Securities Corporation is paid by the fund family from the fees you pay.  A portion of that payment then goes to your Financial Advisor.

 

  • For most purchases, Financial Advisor compensation is based on a compensation formula applied (for A shares) to the front-end sales charge described in the fund’s prospectus or (for B and C shares) to the selling fee (known as a sales concession) which is set and paid by the fund family.

 

  • Ongoing payments (also known as 12b-1 fees or trails) on mutual fund shares that are held in your account are set by the fund family and are generally paid to City Securities Corporation.  A portion of these payments are then passed on to your Financial Advisor

 

  • In most fee-based accounts, Financial Advisor compensation is based on a percentage of the assets in the account rather than on concessions or trails.

 

The compensation formula to determine the amount of payment to your Financial Advisor is the same for all mutual funds.  However, some funds may carry higher sales charges than others and that may create an incentive for Financial Advisors to sell some funds over others.  In all cases, it is our desire to have your investment goals completely met by our firm.

 

What Other Compensation Does City Securities Corporation Receive From Mutual Fund Companies?

 

Like many other securities firms, City Securities Corporation has special marketing arrangements with a small number of fund companies with which it has relationships.  These companies, Federated, American Funds and Russell Funds, made payments to City Securities Corporation in 2007 which were used to sponsor training and educational conferences, meetings for our Financial Advisors, fund marketing and promotion and for other business purposes.  Federated also paid City Securities Corporation’s clearing firm, First Clearing Corporation LLC, a percentage of money market fund assets for account administration and record keeping services that are performed by First Clearing Corporation LLC on Federated’s behalf.  A portion of these payments may be credited to City Securities Corporation through a reduction in clearing charges.  These payments are in accordance with industry rules and regulations.

 

Our Financial Advisors are not obligated to recommend these firms’ funds, nor do they receive additional compensation if they do.  Further, these arrangements do not affect the sales charges you pay to purchase these firms’ funds.

 

Mutual fund policies can be found in a fund’s prospectus and/or Statement of Additional Information (SAI) which are available on request from any fund company.  If you have questions about these practices, please contact your Financial Advisor.

 

Where Can You Learn More About Mutual Funds?

 

To learn more about mutual funds, ask your Financial Advisor or visit the following websites:

 

Investment Company Institute (ICI) at www.ici.org

Financial Industry Regulatory Authority (FINRA) at www.finra.org

Securities and Exchange Commission (SEC) at www.sec.gov

Securities Industry and Financial Markets Association (SIFMA) at www.sifma.org

 

 

Mutual funds are sold by prospectus only which contain further information regarding sales charges and expenses.  You should read the prospectus carefully before investing or sending money.  The information herein has been obtained from sources deemed to reliable, but is not guaranteed and is subject to change without notice.