A mutual fund is an open-end investment company that pools money from many investors to purchase a diversified portfolio of securities managed by professional portfolio managers. Shares are purchased directly from the fund and redeemed at net asset value (NAV) — calculated at the end of each trading day as (total assets − liabilities) ÷ shares outstanding. Because the fund continuously issues and redeems shares, there is no secondary market for mutual fund shares.
Load funds charge a sales charge (load): front-end loads (Class A shares) are deducted at purchase; back-end loads or contingent deferred sales charges (CDSC) (Class B shares) decline over time; level loads (Class C shares) charge an annual fee with a short-term back-end load. No-load funds have no sales charge. The maximum FINRA-permitted front-end load is 8.5%, reduced to 6.25% if the fund doesn't offer reinvestment of distributions at NAV or breakpoints.
Mutual fund expenses are expressed as an expense ratio (ongoing management fee + 12b-1 fee + other expenses as a % of average net assets). The 12b-1 fee (up to 0.75% per year for marketing) is added to the expense ratio; a fund charging no more than 0.25% in 12b-1 fees can call itself "no-load."
Shareholders receive pass-through taxation — the fund distributes ordinary income dividends, capital gain distributions, and return of capital which investors report on their own returns. The fund itself does not pay tax if it distributes at least 90% of its income (regulated investment company rules).
> Exam tip: On the Series 6 and Series 7, know the letter share class distinctions, breakpoints, and the right of accumulation/letter of intent privileges. Remember that mutual fund shares cannot be bought on margin. The public offering price (POP) for Class A shares = NAV ÷ (1 − load %).