IFC Mutual Fund Types and Structures 4 — Questions and Answers
Question 1: A principal-protected note (PPN) linked to a mutual fund primarily guarantees:
- A minimum rate of return above inflation
- Return of the original invested principal at maturity (Correct answer)
- Annual dividend payments throughout the term
- Protection against currency risk on foreign holdings
Correct answer: Return of the original invested principal at maturity
PPNs guarantee the return of the investor's principal at maturity, with any additional return linked to the performance of the underlying fund.
Question 2: Segregated funds differ from mutual funds primarily because they:
- Are sold exclusively through banks
- Are insurance products that offer maturity and death benefit guarantees (Correct answer)
- Cannot hold equity securities
- Are not subject to any management fees
Correct answer: Are insurance products that offer maturity and death benefit guarantees
Segregated funds are issued by insurance companies and include contractual guarantees on maturity and death benefits not available in standard mutual funds.
Question 3: An investor comparing a front-end load fund to a no-load fund would find that the key difference is:
- No-load funds always outperform front-end load funds
- Front-end load funds charge a sales commission at purchase that reduces the initial investment amount (Correct answer)
- No-load funds have no management expense ratio
- Front-end load funds are only available directly from the fund company
Correct answer: Front-end load funds charge a sales commission at purchase that reduces the initial investment amount
Front-end load funds deduct a sales commission from the investor's initial purchase, reducing the amount actually invested in the fund.
Question 4: What is the role of a custodian in a mutual fund structure?
- To sell fund units to retail investors
- To hold the fund's assets safely and separately from the fund manager's own assets (Correct answer)
- To calculate the daily NAVPU
- To approve all investment decisions made by the portfolio manager
Correct answer: To hold the fund's assets safely and separately from the fund manager's own assets
The custodian (typically a bank or trust company) holds the fund's securities in safekeeping, ensuring investor assets are protected from fund manager insolvency.
Question 5: A deferred sales charge (DSC) schedule typically means that:
- No commission is ever charged on the purchase or sale
- A redemption fee is charged if units are sold within a specified holding period (Correct answer)
- The sales commission is paid by the fund company directly to the investor
- A higher MER is charged in lieu of any sales commissions
Correct answer: A redemption fee is charged if units are sold within a specified holding period
DSC funds charge a declining redemption fee if the investor sells units before a set number of years have passed, typically starting around 5–6%.
Question 6: Which type of mutual fund is most likely to distribute interest income rather than capital gains or dividends?
- Equity growth fund
- Bond or fixed-income fund (Correct answer)
- Real estate fund
- Global equity fund
Correct answer: Bond or fixed-income fund
Bond funds primarily earn interest income from their fixed-income holdings and pass this income to unitholders as interest distributions.
Question 7: A mutual fund's simplified prospectus is required to be provided to investors:
- Only upon specific written request from the investor
- Before or at the time of purchase (Correct answer)
- Within 30 days after a purchase is made
- Only when the investor is purchasing more than $10,000 worth of units
Correct answer: Before or at the time of purchase
Securities regulations require that a simplified prospectus be delivered to investors before or at the same time as they purchase mutual fund units.
IFC Mutual Fund Types and Structures 4
A principal-protected note (PPN) linked to a mutual fund primarily guarantees: