1. 11/8/2018
Mutual Fund Overview
Remick Capital, LLC

2. What is a Mutual Fund?
A mutual fund is simply a very specific type of corporate structure that allows a group of investors to pool their money together so that they can invest with professional management and obtain wide diversification with low costs.
Investors supply cash to the fund in exchange for ownership (shares).
Shares
Mutual Fund XYZ
Investor A
Shares
Investor B
Shares
Investor C
11/8/2018
Remick Capital, LLC – © 2009

3. What To Do With that Cash…
The shareholders pay for professional management to select investments. For this, the management gets paid a fee (usually 0.5 – 2.0% / year of total assets).
The mutual fund then purchases investments with the cash.
Investors receive dividend, interest, and capital gains as cash distributions on their shares. The shares will increase (or decrease) in value over time as the underlying investment values (known as Net Asset Value [NAV]) appreciate (or depreciate).
Mutual Fund
XYZ
Stock 1
Stock 2
Stock 3
Stock 4
Stock 5
Investor A
Shares
Investor B
Bond 1
Bond 2
Bond 3
Shares
Investor C
XYZ Fund Management Co.
Shares
11/8/2018
Remick Capital, LLC – © 2009

4. Open Ended vs. Closed Ended Funds
There are two kinds of mutual funds that you need to be aware of:
Closed Ended Funds (CEFs) – These funds are created by an Initial Public Offering (IPO) of shares, and can grow by having secondary offerings.
These funds trade normally on a stock exchange and are bought and sold just like stocks. They trade minute by minute and can be sold anytime of the day.
When selling your CEF shares (outside of an IPO or secondary) you are transacting with other stock market participants which means the price you receive buying or selling will depend on what price another person is willing to trade with you at.
There is no guarantee that you will be able to sell shares of a CEF at an acceptable price relative to the underlying fund assets. Many funds trade at 10-20% discounts to their NAV for this reason.
Open Ended Funds – Shares in open ended funds are bought and sold from the underlying fund itself.
When you buy shares, you add cash into the fund itself and receive new shares as compensation. When you sell, you withdraw cash from the fund, and shrink its overall size
All transactions take place at the NAV which is determined only once per day based on closing prices for the underlying stocks and bonds the fund owns.
11/8/2018
Remick Capital, LLC – © 2009

5. Added Detail
The following pages have some additional detail that may be of interest if you are still curious after the short mutual fund backgrounder on the previous pages
11/8/2018
Remick Capital, LLC – © 2009

6. More Detail on Mutual Fund Fees
In addition to the management fee I described on the previous page, there are many fees that some mutual funds charge:
Management Fee – This fee (as described early) goes to pay the management company who advises the fund on what to purchase for investors.
Administrative Fee – This fee is just as it sounds, it covers other legal, and paperwork costs a mutual fund may have. This fee is usually very small.
12b-1 Fee – This fee is a ‘marketing’ fee. This is paid to an intermediary for helping to sell the fund (usually a financial advisor). This applies only to open ended funds.
Front end load – This is a commission paid by you generally to a broker or financial advisor who is selling you the fund. This is paid as a % of purchase value of the fund, usually 3-8%.
Back end load – This is the same as a front end loaded fund but the commission is assessed on the sale of the shares instead of on the purchase. Generally advisors selling loaded funds will also get all or a portion of the 12b-1 fee (if any) as well.
Stock Commissions – Because the fund is buying and selling stocks and/or bonds on your behalf, the fund also incurs trading commissions. These costs are borne by all fund shareholders but are not disclosed as ‘fees’ when funds report their expenses.
The commonly used “Expense Ratio” is just [Management Fee + Admin Fee + 12b-1 Fee]
11/8/2018
Remick Capital, LLC – © 2009

7. Mutual Funds and Taxes
Taxes for mutual funds can be a little tricky to think about. The mutual fund itself does not pay taxes, it only passes the taxable income from the underlying investments it make on to you.
Interest and Dividends – Interest and dividend income is used first to pay management fees for the fund and what is left over is paid out as a distribution to shareholders. Most funds have a dividend/gains reinvestment option available for shareholders, but the fund does not retain the income itself.
Capital Gains - There are two kinds of capital gains you may pay as a shareholder.
One is on the gains in value of the mutual fund shares themselves
The other is the taxable gains from buying and selling underlying investments by the mutual fund.
This doesn’t make mutual funds inefficient from a tax perspective, but the tax impacts of the investment decisions are *not* controlled by you.
A peculiar side effect of this is that large taxable distributions are often made during bear markets (for open ended funds) because that is usually when lots of investors are selling their shares to raise cash. These sales force the manager of the mutual fund to liquidate holdings to raise cash for investor redemptions. Many investments made during good times have appreciated in value even after a bear market drop so there are gains to be paid on those investments even though the recent performance may have been bad.
11/8/2018
Remick Capital, LLC – © 2009