A client invests $48,000 in a mutual fund. The breakpoint for a reduced sales charge is $50,000. The rep never mentions it. That is not a missed opportunity. That is a FINRA violation called a breakpoint sale. Three product families in this lesson. Each one has a signature trap the exam loves to test.
A mutual fund pools investor money into a professionally managed portfolio. Shares are priced once per day at the close of trading. That price is the net asset value.
NAV = (Total Assets - Liabilities) / Shares Outstanding
A fund with $300 million in assets, $50 million in liabilities, and 12 million shares has an NAV of $20.83. You will see this calculation on the exam.
Open-end funds issue and redeem shares at NAV (plus any applicable sales charge). There is no fixed number of shares. When investors buy, new shares are created. When they redeem, shares are retired.
Closed-end funds work differently. They issue a fixed number of shares through an IPO. After that, shares trade on an exchange at market price, which can be above or below...
Common mistakes
- Calculating sales charge as a percentage of NAV instead of POP. The sales charge on a fund with NAV $18.90 and POP $20.00 is $1.10 / $20.00 = 5.50%. Dividing by NAV gives 5.82%. Trap: 5.82% appears as a wrong answer on nearly every NAV/POP question.
- Assuming variable annuity gains are taxed as capital gains. All variable annuity withdrawals from earnings are ordinary income. The exam offers "long-term capital gains" as a distractor even when the holding period exceeds one year. The annuity wrapper converts everything to ordinary income.
- Confusing accumulation units with annuity units. During accumulation, both the number and value of units change. During payout, the number of annuity units is fixed, only the value per unit changes. If a question says "the number of units decreases," that rules out the annuity phase.
Bottom line
- NAV = (Total Assets - Liabilities) / Shares Outstanding. The sales charge percentage uses POP as the denominator, not NAV.
- Class A charges front-end loads with breakpoints, Class B charges declining back-end loads, Class C charges level loads with higher ongoing fees.
- 12b-1 fee caps: 0.75% distribution + 0.25% service = 1.00% max. Over 0.25% total means the fund cannot call itself no-load.
- Variable annuity withdrawals are taxed LIFO, earnings come out first as ordinary income, and a 10% penalty applies before age 59 1/2.
Exam shortcut
When a question mentions "percentage of POP," divide the dollar sales charge by POP. When it says "percentage of NAV," the question is testing whether you will fall for the wrong denominator. The trap answer always uses the other denominator. For variable annuity payout questions, remember: "Units fixed, dollars float." The number of annuity units locks at conversion.
The full lesson (about 3,402 words, 23 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C11
- C12
- C13
- C14
- C15
- C16
- C17
- C18
- C19
- C20
- C21
- C22
- C23
- C24
- C25
- C26
- C27
- C28
- C29
- C30
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