CSC Mutual Funds and ETFs 3 — Questions and Answers
Question 1: Which Canadian regulatory document replaced the mutual fund simplified prospectus with a shorter, standardized summary?
- Annual Information Form (AIF)
- Fund Facts document (Correct answer)
- Management Report of Fund Performance (MRFP)
- National Instrument 81-101
Correct answer: Fund Facts document
The Fund Facts document is the two-page plain-language summary that replaced the simplified prospectus as the primary point-of-sale disclosure for mutual funds.
Question 2: What distinguishes a 'passive' ETF strategy from an 'active' ETF strategy?
- Passive ETFs charge higher fees
- Passive ETFs track a predetermined index without active security selection (Correct answer)
- Active ETFs always outperform passive ETFs
- Passive ETFs trade more frequently
Correct answer: Passive ETFs track a predetermined index without active security selection
Passive ETFs replicate a benchmark index mechanically, while active ETFs rely on portfolio manager judgment to select securities in pursuit of outperformance.
Question 3: An investor buys mutual fund units at a 5% front-end load. On a $10,000 investment, how much is actually invested in the fund?
- $10,500
- $10,000
- $9,500 (Correct answer)
- $9,050
Correct answer: $9,500
A 5% front-end load means $500 (5% of $10,000) is deducted as a sales commission, leaving $9,500 invested in the fund.
Question 4: Which of the following best describes a 'systematic withdrawal plan' (SWP) offered by mutual funds?
- Automatic reinvestment of all distributions
- Regular redemption of a fixed dollar amount or number of units over time (Correct answer)
- Automatic monthly contributions to the fund
- Switching between funds on a schedule
Correct answer: Regular redemption of a fixed dollar amount or number of units over time
A SWP allows investors to receive regular fixed payments by automatically redeeming fund units, commonly used to generate retirement income.
Question 5: Under the deferred sales charge (DSC) schedule, what typically happens if an investor redeems within the first year?
- No charge applies
- The highest redemption fee (e.g., 5-6%) applies (Correct answer)
- A flat $50 fee applies
- Only a short-term trading fee applies
Correct answer: The highest redemption fee (e.g., 5-6%) applies
DSC schedules front-load redemption fees, typically 5-6% in the first year, declining to zero over 6-7 years to recoup the advisor's upfront commission.
Question 6: Which Canadian National Instrument primarily governs the operations and disclosure requirements of mutual funds?
- NI 31-103
- NI 81-102 (Correct answer)
- NI 45-106
- NI 23-101
Correct answer: NI 81-102
National Instrument 81-102 sets out the investment restrictions, operational requirements, and sales practices applicable to Canadian mutual funds.
Question 7: What is the key difference between a mutual fund's 'distribution yield' and its 'total return'?
- They are identical measures
- Distribution yield reflects only income paid out; total return includes price appreciation and reinvested distributions (Correct answer)
- Total return excludes capital gains
- Distribution yield is always higher
Correct answer: Distribution yield reflects only income paid out; total return includes price appreciation and reinvested distributions
Distribution yield shows only income distributed to unitholders, while total return captures all sources of gain including price appreciation and reinvested distributions.
CSC Mutual Funds and ETFs 3
Which Canadian regulatory document replaced the mutual fund simplified prospectus with a shorter, standardized summary?