Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is meant by the term "sales charge" in relation to mutual funds?

1. A fee charged for maintaining the mutual fund account

2. The additional amount added to the net asset value when purchasing mutual funds

3. A percentage of profits taken by the fund managers

4. A penalty fee for early withdrawal from a mutual fund

The correct answer is: The additional amount added to the net asset value when purchasing mutual funds

The term "sales charge" refers to the additional amount added to the net asset value (NAV) when purchasing mutual funds. This fee is often called a "load" and is designed to compensate brokers or financial advisors who sell the mutual fund. The sales charge is typically expressed as a percentage of the total investment amount and is paid upfront when shares are purchased. This fee serves as an incentive for advisors to recommend specific funds and can vary depending on the mutual fund provider. In contrast, the other options relate to distinct fees or charges associated with mutual funds. A fee charged for maintaining the mutual fund account pertains to ongoing administrative costs rather than a charge involved in the initial purchase. The percentage of profits taken by fund managers points to management fees or performance fees, which are not included in the sales charge. Lastly, a penalty fee for early withdrawal refers to redemption fees or penalties that some funds may impose but does not define the sales charge itself. Understanding these distinctions is essential for investors evaluating the overall cost of investing in mutual funds.