ChuckJaffe

Elizabeth P. is a 50-something widow in Madison, N.J. who is now controlling the mutual fund portfolio she and her late husband put together over the last two decades.

She owns the funds, but doesn’t really understand what she’s got or how they work. Her tax paperwork from 2012 confuses her. She doesn’t quite seem sure how funds work, and she was ready to sell some holdings because ordinary events that would not faze a savvy investor had her thinking something nefarious or criminal was going on.

Mike Flippo / Shutterstock.com

You don’t need to know anything about funds — or pass some test — in order to buy them.

There is, however, a minimum amount of knowledge investors should have in how traditional funds and exchange-traded funds work, and with April being National Financial Literacy Month, it’s as good a time as any to review the absolute basics.

Thus, class is now in session, and you’re getting a pop quiz on basic things all fund shareholders should know. The questions are not designed to stump you, just to test your level of knowledge and awareness; knowing the answers does not guarantee you will pick better mutual funds or ETFs, but should make you more able to understand what is happening in your funds, and to avoid the unpleasant surprises that come with not understanding how they really work.

1. You invest in a general-equity fund called ABC Aggressive Growth. What percentage of the fund can be concentrated in any one sector or specialty, such as technology stocks or real estate investment trusts?

(a) 25%

(b) 65%

(c) 80%

(d) unlimited

2. You own the XYZ Utilities fund. How much of that fund MUST be invested in utility stocks?

(a) 100%

(b) 80%

(c) 65%

(d) 25%

3. True or false: A diversified mutual fund cannot invest more than 5% of its assets in any one stock or security.

4. What is the minimum number of positions a mutual fund must have in order to be considered “diversified”:

a) 16

b) 30

c) 100

d) 500

5. True or false: You can lose money in a fund during a calendar year, but still owe capital gains taxes on the investment profits realized by the fund during the year.

6. True or false: Every time a fund pays shareholders a capital gain or dividend distribution, its share price falls by the amount of that payout.

7. Which of these fees is a no-load mutual fund allowed to charge investors:

a) termination fee

b) short-term redemption fee

f) all of the above.

8. Of the following items, which are not included when a fund calculates its total expense ratio?

a) brokerage/trading costs

b) management fees

c) 12b-1 fees for sales and marketing of the fund

d) front- or back-end sales charges

e) shareholder mailings

f) interest expenses a fund incurs when borrowing money

g) account maintenance fees.

9. True or false: A fund that invests only in insured bonds or US government bonds cannot lose money.

10. A mutual fund you buy this year goes up by 15%. Next year, it loses 15 percent. Have you broken even?

See the next page for answers.