IFC Mutual Fund Types and Structures 5 — Questions and Answers
Question 1: Which of the following best describes a 'wrap account' in the context of mutual funds?
- A fund that wraps its assets in insurance guarantees
- A managed account that bundles multiple mutual funds with advisory services for a single all-inclusive fee (Correct answer)
- A fund that automatically reinvests all distributions
- A short-term money market fund used as a temporary holding account
Correct answer: A managed account that bundles multiple mutual funds with advisory services for a single all-inclusive fee
Wrap accounts combine investment management, advice, and administration of multiple funds or securities into one account with a single bundled fee.
Question 2: A mutual fund's management expense ratio (MER) includes which of the following costs?
- Brokerage commissions paid on portfolio trades
- Management fees, operating expenses, and taxes charged to the fund (Correct answer)
- The investor's front-end sales load
- The cost of purchasing the underlying securities
Correct answer: Management fees, operating expenses, and taxes charged to the fund
The MER captures the management fee paid to the fund manager plus operating expenses and applicable taxes, expressed as a percentage of average net assets.
Question 3: Under the fund-of-funds structure, a key concern for investors is:
- The fund cannot hold more than 10 underlying funds
- Potential layering of fees, as both the top-level fund and underlying funds charge MERs (Correct answer)
- The underlying funds must all be managed by the same company
- Investors cannot redeem units of a fund-of-funds on demand
Correct answer: Potential layering of fees, as both the top-level fund and underlying funds charge MERs
Fund-of-funds structures can result in double-layered fees because investors pay the MER of the top-level fund plus the MERs of all underlying funds held.
Question 4: A mutual fund that uses derivatives to provide returns that are a multiple (e.g., 2x) of a benchmark index is called a:
- Index fund
- Leveraged fund (Correct answer)
- Balanced fund
- Clone fund
Correct answer: Leveraged fund
Leveraged funds use derivatives or borrowing to amplify benchmark returns, but they also amplify losses, making them higher-risk products.
Question 5: When a mutual fund 'distributes' income to unitholders, the NAVPU of the fund will typically:
- Increase by the amount of the distribution
- Decrease by the amount distributed per unit (Correct answer)
- Remain unchanged because distributions come from unrealized gains
- Double as a result of the distribution
Correct answer: Decrease by the amount distributed per unit
When a fund distributes income or capital gains, the NAVPU drops by the per-unit distribution amount because cash leaves the fund.
Question 6: An ethical or socially responsible investing (SRI) mutual fund differs from a conventional fund primarily because it:
- Charges no management fees to reflect its social mission
- Screens investments based on environmental, social, and governance (ESG) criteria (Correct answer)
- Invests only in government bonds and avoids all equities
- Guarantees that no capital losses will occur
Correct answer: Screens investments based on environmental, social, and governance (ESG) criteria
SRI funds apply ESG screens to exclude or include companies based on non-financial criteria such as environmental impact, labour practices, and corporate governance.
Question 7: The net asset value per unit (NAVPU) of a mutual fund is calculated as:
- Total liabilities divided by the number of units outstanding
- Total assets minus total liabilities, divided by the number of units outstanding (Correct answer)
- Total assets multiplied by the management expense ratio
- The market price of the fund as quoted on a stock exchange
Correct answer: Total assets minus total liabilities, divided by the number of units outstanding
NAVPU equals the fund's total assets minus its total liabilities, divided by the total number of units outstanding, calculated at least daily for open-end funds.
IFC Mutual Fund Types and Structures 5
Which of the following best describes a 'wrap account' in the context of mutual funds?