Deducting Distribution Costs

D

The 12b-1 plan permits funds to deduct as much as 1.25 percent of average net assets per year to cover distribution costs.

The correct answer is D. The 12b-1 plan.

The 12b-1 plan refers to a provision under the Investment Company Act of 1940 that permits mutual funds to deduct fees for the purpose of covering distribution costs. These fees are called 12b-1 fees, named after the section of the act that allows them.

The 12b-1 fees are paid by the mutual fund out of its assets to cover various expenses related to the distribution and marketing of the fund's shares. These expenses may include marketing and advertising costs, commissions paid to brokers or sales agents, and other costs associated with promoting and selling the fund.

The 12b-1 fees are expressed as a percentage of the fund's average net assets per year, and they are subject to certain limitations. The maximum amount that can be deducted as 12b-1 fees is currently set at 1.25 percent of the fund's average net assets.

It's important to note that the purpose of the 12b-1 fees is to facilitate the distribution of mutual fund shares and make them more widely available to investors. However, these fees can also impact the overall expense ratio of the fund, which is the total annual expenses expressed as a percentage of the fund's average net assets. Higher 12b-1 fees can result in higher expense ratios, which can affect an investor's returns.

To summarize, the 12b-1 plan allows mutual funds to deduct fees, known as 12b-1 fees, from their assets to cover distribution costs. These fees are limited to a maximum of 1.25 percent of the fund's average net assets per year.