Capped funds are just what they sound like...funds with a cap on them. No, these aren't the funds that are balding and want to hide it. It means there's a cap on expenses being charged to the investors holding shares in that fund.
Investment companies charge the people they handle investments for. It's like a participation fee, or the fee the management company collects for offering its expertise to the investor. Picture the investor as the queen asking for a favor from the management company Rumpelstiltskin. This fee setup specifies exactly what the fees will be, and keeps the investment company from collecting a boatload of extra fees and the first-born kid too (unless your kid is in the Terrible Twos and you'd like him to live with Rumpelstiltskin for a bit...totally up to you).
Capping the expenses outlines a fee schedule of sorts, so the investor knows exactly what they are paying and why, and also sets up a process where the company has to seek approval from its management board in order to change the fees. Once it's approved, the investors are notified of the change and have the option to leave the company (and their Stiltskin-like ways).
Related or Semi-related Video
Finance: What is a Wrap Account?31 Views
Finance allah shmoop what is a rap account Okay yeah
yeah inserted joke about eminem here a rap account with
a w wraps into one annual fee All of the
services you'd normally pay for ala carte at a given
brokerage that is a broker might charge you a one
percent rap account fee to manage all the assets you
have with her in return for things like quote no
fee unquote access to their proprietary mutual funds you get
toe by the mutual funds no load and the quotes
air there because there is a fee annually to manage
the fund But at least this way there is no
fee to buy into the fund or no load their
god it see how that works The rap account can
also include unlimited trading at quote no fee unquote as
well like quotes or there again because there's usually a
spread on each trade like you buy a twenty eight
dollars and twenty seven cents and you sell a twenty
eight dollars in nineteen cents So there's a seat since
spread they're they're still making money on each trade There
just isn't an incremental fee tacked on top of all
That so your broker khun get that second home in
the hamptons and that one percent feet Well that's based
on the total amount invested with the broker got it
So if you have a million dollars invested with them
it's ten grand a year for that rap account fi
system we'll wrap accounts often come with minimum investment levels
well above those of a mutual fund like twenty five
fifty grand or more But in having a one feet
covers all approach a broker is not incentivized to churn
the account or do really anything to generate commissions for
themselves because there ain't any The only thing they're incentivized
to dio is gather more of your assets or make
your assets be worth more so they can keep going
on the whole one percent dance Yeah the notion goes
in theory anyway that if the broker helps client invest
well over time the client will remain a loyal one
and stay with that broker for a very long high
margin to the brokers Time for many large brokerages rap
accounts allowed their clients to be able to buy various
flavors of funds mutual hedge or index at quote wholesale
Prices unquote That is if the fund is a captive
fund maintained by the brokerage The rap account allows the
client to buy with no commissioner upfront charges which is
kind of a nice nice deal for him Yeah quick
example If jay z gives his broker one hundred million
dollars under a rap account that charges one percent the
broker will charge a million bucks a year in return
for handling all of jay z's trading wiring and a
whole bunch of other services got it One percent on
the hundred million broker makes million bucks a year and
if jay z also has a rap account you know
with no w there Well there's always a chance Queen 00:02:45.555 --> [endTime] bee well pop in for a cameo
Up Next
What are mutual funds? Mutual funds are an aggregation of stocks, professionally managed for a "small" fee. Investors wanting exposure to a given a...
What is a Closed-End Fund? Mutual Funds are usually categorized as either open end, meaning that additional shares are given to new subscribers at...
What is a 12b1 fee? A 12b1 fee is paid on mutual funds. The fee is paid by investors and is used to market the mutual fund to other potential inves...
An omnibus account is an investment account in which a collection of investors have invested their capital to own a pro rata share of that cooperat...