Question

• Mutual funds are managed by an investment company. The owners of the mutual fund are different from the shareholders. The investment company owners do not, necessarily, invest in the mutual funds they are managing. Discuss whether this situation results in an incentive for the owners of the investment company to charge higher fees to the mutual funds investors.
• 250 words

Answer 1

As we all know a mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.

Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.

The investment company owners do not, necessarily, invest in the mutual funds they are managing. it is their own discretion to whether they have to invest on that mutual fund or not. they can only manage the funds on the behalf of mutual fund units holders.

For managing the fund they charge different kinds of fees include purchase fees; sales charges, or the mutual fund load; deferred sales charges; redemption fees; account fees; and exchange fees. but these kind of fees are already fixed by The Securities and Exchange Commission (SEC). Investment company can't charge excess fees beyond the statutory limits.

The Securities and Exchange Commission (SEC) requires a fund company to disclose shareholder fees and operating expenses in its fund prospectus. Investors can find this information in the fee table situated near the front of the prospectus.

The Securities and Exchange Commission (SEC) is a regulatory body for regulating the mutual fund companies and also for issuing directions.

Fees are easily the largest source of revenue for basic mutual fund companies, though some companies may make separate investments of their own.

A Load Fund is one that charges a percentage of NAV for entry or exit and the load structure in a scheme has to be disclosed in its offer documents.

Expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund's daily net assets. Operating expenses of a scheme are administration, management, advertising related expenses.

So, Mutual fund investors should carefully read all the documents related to scheme and should cross verified the chares or rate charging by investment company with statutory rates.

Although expense rates are fixed but some investment companies charging less than the rate fixed by regulating authority.