Investing with Mutual Funds
Mutual funds provide a variety of services and benefits that help make saving and investing simple, accessible, and affordable. Investors should take the time to understand the different types of fees and expenses associated with mutual fund investing.
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How to Get Started
We support the concept of professional financial guidance. Why? Because financial advisors are trained to help you determine your long-term investment objectives, your time frames, your capacity and tolerance for risk, and the types of investments most appropriate to help you achieve your goals.
We suggest you choose a financial advisor in much the same way you would choose any other professional. Rely on family and friends who have had positive experiences. If you get the names of several advisors, interview each of them. You’ll be making important, long-term financial decisions with their guidance, so you want to feel comfortable sharing personal information with them and be sure that their approaches and areas of expertise are a good match for you.
Read the prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Every mutual fund provides a legal document called a prospectus, which spells out in detail the fund’s investment goals and strategies, how to buy and sell shares, what services are available to shareholders and certain performance results. The prospectus also contains detailed information about a fund’s sales charges, expenses and risks. This important information can help you decide if a fund is right for you. A summary prospectus may also be available for a mutual fund. This document is a summarized version of the prospectus and contains key information about the fund.
The prospectus is free to you directly from the fund or from your financial advisor. Be sure to read it carefully before you invest or send money. For more information on mutual fund prospectuses and other fund literature see: Reading A Prospectus and Reading a Shareholder Report.
Net Asset Value and Public Offering Price
When you buy and sell mutual funds, it’s important to understand the difference between the public offering price and the net asset value. The public offering price (POP) of a mutual fund is the price at which mutual fund shares are offered for sale to the public. This price represents the net asset value plus any applicable initial sales charges.
A mutual fund’s net asset value (NAV) is the market value of one share of a mutual fund on a given day; also known as the bid price. Unlike the public offering price, the NAV includes no sales charges. It is calculated each business day by taking the closing market value of all securities owned by the mutual fund, plus all other assets (e.g. cash) and subtracting liabilities. To establish the NAV per share, the remainder is then divided by the total number of shares outstanding.
Fees and Expenses
Mutual fund fees generally fall into two categories—sales charges (fees paid directly from your investment) and fund expenses (deducted from fund assets). Information about the different charges and expenses for each mutual fund can be found in the fund’s prospectus.
Sales charges compensate financial advisors for their services. Financial advisors can help you define your needs, narrow the search for investments, assist with lifetime planning, and many other financial situations. By offering market knowledge and planning expertise, financial advisors can help with developing a solid asset allocation plan specifically designed to meet your objectives.
Sales charges vary by share class. Different classes of shares allow you to pay sales charges in different ways. For example, Class A shares typically deduct the sales charge up front, at the time of investment. In comparison, Class C shares usually impose a small deferred sales charge that is paid if fund shares are sold within a short time of purchase, often one year. Class C shares will generally have higher annual fees and expenses than Class A shares. To learn more about Franklin Templeton fund sales charges, please consult a fund’s prospectus.
Discounts for Large Purchases
Breakpoints. There can be sales charge discounts when you make purchases of Class A shares over a certain dollar amount. Details about these breakpoints can be found in the fund’s prospectus.
Letter of Intent. If you plan to purchase a large quantity of mutual fund shares within a 13-month period, you may qualify for a discount according to the fund’s schedule of breakpoints. If so, you can sign a Letter of Intent (LOI). The LOI is not binding, but failure to complete the purchases required under the LOI will mean loss of the discount on sales charges.
Fund expenses are fees that help pay for the ongoing costs of running a fund and other services. Fund expenses help pay for management and administration, reporting costs, taxes, legal and audit fees.
Management fees. These fees are ongoing and are charged by the fund’s investment advisor to manage the fund and select its portfolio of securities. The managers’ market knowledge and expertise in selecting appropriate securities for the fund are essential to helping the fund meet its investment objectives, while not incurring undue risk. There may be circumstances in which it is appropriate to charge higher expenses, depending on the fund’s investment strategy. For example, certain types of funds require more sophisticated research efforts by their managers, such as international stock funds that typically depend on research from multiple people in multiple locations.
12b-1 fees. These fees are paid by mutual funds to cover marketing and distribution expenses, such as compensating sales professionals, directly from their assets. This fee is assessed against a fund’s total net assets.
Can Fees Change?
A mutual fund’s directors or trustees annually review the management fees paid. Any change in these fees must be approved by a majority of the fund’s directors and a majority of the holders of a fund’s shares. Any increase in a 12b-1 fee must also be approved by shareholders.
Dividends and Capital Gains
A distribution is a payout to shareholders resulting from a mutual fund’s realized capital gains, interest or dividend income. Distributions will vary depending on a fund’s income and any profits collected from the sale of securities in a fund’s portfolio.
Dividends. A fund will pay out dividends derived from interest received from its bond holdings or dividends received from its stock holdings. Dividends may be paid out monthly, quarterly, semiannually or annually, depending on the fund.
Capital gain distributions. Capital gain distributions are the profits realized from the sale of stocks or bonds in a fund’s portfolio. Each time a fund sells a security in its portfolio, a gain or a loss is realized on the sale. Generally, once a year (though sometimes more often) a fund will distribute the net realized long-term and short-term capital gain (gains minus losses) of the portfolio to the fund’s shareholders.
Eligible shareholders are paid their proportional share of a distribution on the fund’s payable date or reinvestment date. Most mutual funds offer the option for shareholders to automatically reinvest dividends and capital gain distributions at NAV. This option can be an easy and effective way to grow an investment account over time.
If held in a taxable account, distributions are generally taxed whether they’re paid out in cash to the shareholder or reinvested. A capital gain distribution will lower the fund’s share price (NAV) by the amount of the distribution. If an investor chooses to reinvest capital gain distributions, then the number of shares in the account will increase accordingly, and the account value will remain the same. If a mutual fund’s overall performance for the year was down, the fund might still have realized profits that need to be distributed to shareholders.
Although dividend-paying stock and bond funds may generally seek to pay relatively regular dividends to their shareholders, dividend amounts will vary, depending on the fund’s income. And past distributions are not an indication of future distributions.
Mutual Funds Share Classes
Mutual fund share classes offer investors different ways to make mutual fund purchases that best meet their individual needs. Most Franklin Templeton funds offer two share classes for retail investors: Classes A and C.
Each share class has its own sales charge and expense structure. Your financial advisor can help you evaluate which share class best meets your situation. It’s important to consider how much you plan to invest and how long you expect to own shares of the fund. The following table shows how charges and expenses vary for Class A and C shares.
Overview of A and C Shares
|Class A||Class C|
|Investor Profile||Investors who purchase Class A shares typically have a long-term perspective and want to avoid paying higher ongoing fees and expenses. These investors also seek to take advantage of quantity discounts (breakpoints) through large share quantity purchases.||Investors who purchase Class C shares typically have a shorter investment time horizon and/or have smaller amounts to invest. These investors usually prefer to “pay as they go” for professional investment advice.|
|Front-end sales charge||Yes, generally 5.75% for equity funds
4.25% for long-term fixed income funds
2.25% for intermediate-term and limited-term fixed income funds
|Back-end sales charge, (contingent deferred sales charge, CDSC)||No1, 2||Yes, 1.00% for 12 months|
|Quantity discounts (breakpoints)||Yes||No|
|Expenses (relative)||Generally lower than Class C||Generally higher than Class A|
The Difference between A and C Shares
The primary difference between share classes is the structure and timing of the sales charges and expenses. Depending on which share class you choose, you’ll pay a sales charge when you buy or sell your shares. The majority of this sales charge then goes to financial advisors as compensation for their advice and expertise.
Important Legal Information
All investments involve risks, including possible loss of principal. Dividends will vary, depending on the fund’s income, and past distributions are not indicative of future trends.
For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.
This material is provided for educational purposes only and is not intended as investment advice or an offer or solicitation to buy or sell securities.
- For NAV purchases of $l million or more, a CDSC of 1% may apply for equity funds, 0.75% for fixed income funds, to shares redeemed within 18 months.
- Please see each fund’s prospectus and Statement of Additional Information for CDSC waivers.
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