Mutual Fund Structure & Expense Ratio — Q&A

The number of outstanding shares can change daily — each purchase creates new shares and each redemption destroys shares.

Primary market. Mutual fund transactions always involve the issuer (the fund), similar to an IPO.

At least $100,000 (Investment Company Act §14(a) — net worth; “net capital” is the broker-dealer test).

At least 75% of assets must be invested so that no more than 5% of fund assets are in one issuer’s securities and no more than 10% of one issuer’s voting power is held.

Total annual operating expenses equal 1% of assets — $1 million per year. The fund retains a portion of returns to cover costs.

The management fee paid to the investment adviser.

No to both. Margin is prohibited because mutual fund purchases are primary market offerings, which cannot be bought on margin.

Fund sponsor (establishes and registers the fund with the SEC); Board of Directors (represents shareholders, approves dividends); investment adviser (manages investments, employs fund manager); custodian bank (holds and safekeeps fund assets).

Holding dozens or hundreds of securities reduces exposure to non-systematic (capital) risk — losses in one holding may be offset by gains in others.