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

What is true about mutual funds?

1. They require no initial investment from investors

2. They are subject to performance fees and sales charges

3. They are exclusively traded on the primary market

4. They provide guaranteed returns regardless of market conditions

The correct answer is: They are subject to performance fees and sales charges

Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. When it comes to costs associated with mutual funds, many funds impose performance fees and sales charges, which can influence the overall return to the investor. Performance fees may be charged based on how well the fund performs relative to a benchmark, while sales charges, often referred to as "loads," are fees paid when shares are purchased or sold. Understanding these fees is crucial for investors, as they impact the net returns on their investments. It’s important for investors to consider these costs relative to their investment goals and the potential for returns. In contrast, the other options do not accurately reflect the nature of mutual funds. While some mutual funds may offer low minimum initial investments, it is not true that they require no initial investment from any investor. Mutual funds are also traded primarily in the secondary market, and they do not guarantee returns, as their value can fluctuate based on market conditions. This illustrates the key characteristics of mutual funds and why performance fees and sales charges play an important role in their operations.