Mutual Funds

Investing in a Mutual Fund Contractual Plan

A mutual fund contractual plan is where an investor must make a long-term commitment of 10 or 15 years. These plans come with high upfront costs and are expensive if the full term of payment is not completed. Read the prospectus thoroughly whenever investing in a mutual fund contractual plan.

A mutual fund contractual plan will allow you to accumulate shares of a mutual fund indirectly by making small regular monthly payments, usually as little as $50. These plans have a number of common characteristics that you should be aware of before investing.

These plans have a high first year cost to pay for a sales and creation cost equal to 50% of the first 12 monthly investments. Moreover, if you increase the amount of your monthly payments, you may owe an additional creation and sales charge on the new investment. This charge will be deducted from your next 12 monthly payments if you increase the face amount of your payment.

Typically, a mutual fund contractual plan will require a long-term investment up to180 fixed monthly payments over a 15-year period. This includes the option of making payments for up to 25 years adding up to 300 investments. If you terminate the mutual fund contractual plan prior to expiration or stop making payments even though you are not required to complete the payments a sales charge of up to 50% of the amount invested could be applied .

This type of plan contains no direct mutual fund ownership if you invest in a mutual fund contractual plan. This means one does not directly own shares in a mutual fund; rather he will own an interest in a trust. The trust invests your regular payments, minus fees and expenses, in shares of a mutual fund.

Cancellation and Refund Rights:

One type of cancellation and refund right an investor will obtain is a 45 day cancellation notice within 60 days of your first investment in the plan. One can also cancel the plan within 45 days of the mailing date of that notice. If the investor does cancel the plan they will receive a cash refund equal to the current value of your investment and the total sales and creation charge originally paid. The current value of your shares may or may not be more than your original investment.

Another type of cancellation is the 18 month cancellation and refund right after your first investment in the plan. Choosing to cancel the plan after the 45 day cancellation period means the investor will receive a cash refund equal to the current value of your investment and the amount of the sales and creation charge paid that exceeds 15% of the total investments. A notice of your 18-month cancellation right will be issued if you miss three or more of your monthly payments during the first 15 months of the plan or one or more payments after the first 15 months. Canceling a plan after 18 months would mean the investor isn’t entitled to a refund of any creation and sales charge. This charge can be up to 50% of your periodic investments.

The sponsor may terminate your plan if you fail to make investments for a period of 6 or 12 consecutive months. The investor may be able to avoid termination by making at least one monthly payment during each 6 or 12 month period depending on the plan.