Mutual Fund Types and Structures Flashcards
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Read the first 6 Mutual Fund Types and Structures flashcards as text
Which of the following is a defining characteristic of an open-end mutual fund?
Answer: It continuously issues and redeems units directly with investors at the Net Asset Value Per Share (NAVPS).
The structure of an open-end mutual fund allows it to grow or shrink in size as investors buy new units from the fund company or sell (redeem) existing units back to the company. These transactions occur at the fund's next calculated NAVPS. In contrast, closed-end funds issue a fixed number of shares at inception which then trade on an exchange.
A mutual fund reports total assets of $250 million and total liabilities of $10 million. If the fund has 12 million units outstanding, what is its Net Asset Value Per Share (NAVPS)?
Answer: $20.00
The formula for NAVPS is (Total Assets - Total Liabilities) / Number of Units Outstanding. In this case, ($250,000,000 - $10,000,000) / 12,000,000 = $240,000,000 / 12,000,000 = $20.00.
An investor wants a single investment solution that provides broad diversification by investing in a portfolio of other mutual funds. This investor is comfortable with paying two layers of management fees in exchange for this professional oversight and asset allocation. Which fund type is most suitable?
Answer: A fund of funds
A fund of funds (FoF) is a mutual fund that invests in other mutual funds rather than directly in individual securities. This structure provides instant diversification across various fund managers and strategies but typically involves a second layer of management fees (the MER of the FoF itself plus the MERs of the underlying funds).
What is a key tax advantage of a mutual fund corporation structure compared to a mutual fund trust for an investor holding the fund in a non-registered account?
Answer: Switches between different fund classes within the same corporation are generally not considered a taxable disposition.
Historically, a major advantage of the mutual fund corporation structure was that switches between different share classes (funds) within the same corporation were not considered a taxable event, allowing for tax-deferred rebalancing. While 2017 tax rule changes limited this benefit, it can still exist in certain situations, distinguishing it from mutual fund trusts where any switch is a disposition. Mutual fund trusts flow through most income and gains to unitholders, while corporations can be more tax-efficient in managing these distributions.
An investor purchased a mutual fund with a Deferred Sales Charge (DSC) schedule prior to the 2022 ban. If they redeem their full investment two years into a seven-year schedule, what is the most likely consequence?
Answer: They will be charged a redemption fee, calculated as a percentage of the amount invested, which decreases the longer the fund is held.
Although new sales of DSC funds were banned in Canada effective June 1, 2022, existing funds purchased before this date are allowed to complete their original schedules. A DSC is a redemption fee that declines over time, typically to zero after five to seven years. Redeeming early in the schedule results in a fee being charged.
A balanced fund would typically invest in which of the following?
Answer: A mix of equities and fixed-income securities.
A balanced fund's primary objective is to provide a combination of safety, income, and capital appreciation. It achieves this by holding a diversified portfolio that includes both equity securities (for growth) and fixed-income securities (for income and stability).