Investing in Mutual Funds

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Many U.S. financial institutions now directly sell mutual funds and stocks. It may seem easier to purchase these funds from banks, but there are no guarantees, no bailouts, and no insurance “safety nets” to protect against losses. Not all products sold within a bank are protected by the Federal Deposit Insurance Corporation (FDIC).

What are the Facts?

Typically, FDIC insures bank deposits of up to $250,000 per customer for traditional products, such as savings accounts and certificates of deposit (CDs). However, this coverage doesn’t extend to mutual funds, stocks, or annuities. Banks also aren’t required to return all of your initial investment for an uninsured product.

In other words, the risk level is the same as if you invested through a brokerage firm, investment company, or insurance company.

This doesn’t mean you should entirely avoid buying uninsured investments from your bank. Banks are just another option for consumers who can invest in mutual funds, stocks, and annuities—and understand the risks.

This page contains information for potential bank mutual fund customers. This advice can also help if you plan to purchase other uninsured products, like stocks or annuities.

Let’s start by examining the mutual fund purchasing process.

How Mutual Funds Work

A mutual fund pools money from many investors to purchase securities. Rather than buying a single security, a mutual fund distributes proportionate shares of the fund's holdings to each investor. Common bank-owned mutual funds include stock and income funds.

Mutual fund managers decide when to buy, sell, and hold investments in the fund’s securities. For small investors, this expertise helps minimize risk by diversifying the investment.

Each day, the fund must determine the value of the stocks in its portfolio. The overall value of the “basket” of securities, divided by the number of outstanding shares in the mutual fund, is called the Net Asset Value (NAV). The NAV tells you the worth of each share in the mutual fund.

Inherent Risk

Like any other uninsured investment, mutual funds involve risk. You could make money with a mutual fund, or lose your investment entirely. Unlike a certificate of deposit, which offers a fixed return for a specific period of time, mutual funds may vary in value each trading day.

Bank Mutual Fund Types

Money Market Funds

Money market funds are mutual funds that invest in securities with short maturities and minimal credit risk. However, while they carry lower risk levels, they are still unsecured investments without FDIC protection.

Money market mutual funds differ from “money market accounts,” which are insured by the FDIC. Make sure you know which type of “money market” you are considering.

“Insured” Municipal Mutual Funds

Banks may also offer “insured” mutual funds in the tax-exempt municipal fund market. Despite the name, these investments are not protected by the FDIC. The limited, private insurance in such funds extends only to credit risk for the mutual fund issuer. This coverage is not intended to return money to investors if the value of mutual fund shares declines.

How Banks Sell Mutual Funds

Banks use two major methods to sell mutual funds:

• Some banks rent out their lobby spaces to outside brokerage firms and investment companies.
  • Other banks may offer “private label” mutual funds, which may use similar branding.
• Some bank-offered mutual funds bear names that are confusingly similar to those of the financial institutions.

What to Know When Considering Bank Mutual Funds

1. Remember that any mutual funds sold by banks (including money market funds) are not FDIC- insured. You can lose money invested in a mutual fund, regardless of how you acquired it.
2. Beware of advertising and branding that may blur the line between a bank’s insured and uninsured products. Your bank is not obligated to cover losses suffered in a mutual fund investment. Make sure you know whether the product is insured or uninsured.
3. Remember that mutual funds (including those sold at banks) are different from insured, fixed-rate investments, such as CDs. Mutual fund prices can vary every day, and past performance is no guarantee of future results.
4. Review your investment objectives and risk tolerance before choosing a mutual fund. Most investors will find that it makes sense to diversify their portfolio, rather than placing all of their nest eggs in one “basket.” Sellers are supposed to determine if an investment is appropriate for you, and they should start with some of these questions:
   • What are your plans and what investments do you need to achieve them?
   • Do you need stability, growth or a steady income stream from your investment?
   • How much risk can you afford to assume in pursuit of higher returns?
5. Always compare offers for mutual funds, especially if you are a first-time investor.
   • Don’t just rely on verbal assurances from salespeople. Get everything in writing.
   • Look at offers from other banks and brokerage firms. You don’t need to limit yourself to buying uninsured investment products from your current bank.
6. Understand all fees and charges associated with your mutual fund. Every fee should be summarized in a fee table in the prospectus.
   Some common fees include:
   • A front-end load (or asset-based sales charge), assessed upon purchase. These fees can’t exceed 8.5% of the total purchase price, and they usually cover commissions for the assisting broker or sales agent. You may be able to lower or eliminate this sales charge by buying directly from an investment company.
   • A back-end charge (or contingent deferred sales charge), assessed upon the redemption of your share. This charge declines over time.
   • Management fees (sometimes referred to as “investment advisory fees” or “account maintenance fees”), imposed by fund advisors to cover the cost of managing the mutual fund.
   • “12b-1” fees, which cover marketing and distribution costs. Some mutual funds have no front-end load, but make up for it by imposing back-end charges and 12b-1 fees.
7. Review the prospectus disclosure document. This can help you understand whether the mutual fund meets your financial goals. Review the objectives, the types of risk, and the assessed fees. Compare them to similar funds with comparable objectives.

How to Report a Concern

If you experience any issues with your mutual fund, or you don’t understand a recent message about your investment, contact your bank’s brokerage firm unit for help.

If your bank cannot resolve the issue, or if you suspect misconduct, contact us for guidance on complaint reporting.

Front-End Mutual Fund Sales Charges: Breakpoints

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Potential mutual fund investors may encounter payments called “loads,” which often cover the work needed to find and sell investments. Loads are usually one-time charges, deducted from a deposit or purchase fund, and they’re typically imposed by a broker or investment adviser.

Some mutual fund advisers require investors to pay a load when they purchase shares of the fund. These are called “front-end loads.” Conversely, “back-end loads” occur when a share is sold. Front-end loads are far more common in mutual fund investing.

To help encourage investing, many mutual fund companies offer investors a discount on sales charges. They base the discount on the amount invested in a front-end mutual fund. The point when the amount invested reduces the sales charge is called the “breakpoint.” Each mutual fund may have several breakpoints -- the larger the investment, the greater the discount.

Sample Breakpoint Schedule

Important Points

• Mutual fund companies are not required to offer breakpoints.
• Each company will have its own rules for when to apply breakpoints and how to calculate the discount.
• Brokers should not sell investors mutual fund shares just under a breakpoint without a full explanation.

General Rules for Breakpoints

• Letter of Intent (LOI): LOIs allow investors to make a written commitment to invest a certain amount of money over a period of time. If during that period of time, the amount invested crosses the breakpoint threshold, the investor qualifies for a lower initial sales charge.
• Right of Accumulation (ROA): ROAs allow investors to combine prior mutual fund purchases with current purchases in the same mutual fund or related mutual fund family to reach a breakpoint and obtain a lower sales charge.
• Family Discount: Investors may be able to combine mutual fund purchases for related accounts (such as an IRA, spousal, or children’s account), or combine purchases of different mutual funds that are part of the same fund family, or class of funds, to qualify for a breakpoint and obtain a lower sales charge.

Questions to Ask a Broker or Investment Adviser

• Will I have to pay a front end sales charge?
• Are breakpoint discounts available with this mutual fund?
• What are the rules for applying breakpoints to purchases of this mutual fund?
• If I intend to invest in additional shares over a period of time, can I submit a Letter of Intent and qualify for a breakpoint discount?
• Can I combine prior mutual fund purchases with current purchases in the same mutual fund or related mutual fund family in order to obtain a breakpoint?
• Can I combine my mutual fund purchases with those of other household members in order to qualify for a break-point discount?

What Else Can Investors Do?

• Read the mutual fund Prospectus and Statement of Additional Information for details on breakpoints.
• Ask your broker or investment adviser about any sales-related charges associated with your investment.
• Verify the credentials and registration of any broker or investment adviser by contacting us.

What if You Didn’t Receive a Breakpoint, but Expected One?

• Review past mutual fund transactions, and look for any past purchases that qualified for a breakpoint.
• If you didn’t get one, request the discount from your broker or investment adviser in writing.
• If your broker or investment adviser rejects your request (or doesn’t respond), contact us.