IFC - Investment Funds in Canada Mutual Fund Types and Structures Questions and Answers

Question 1

Which of the following is a defining characteristic of an open-end mutual fund?

Accepted Answer

It continuously issues and redeems units directly with investors at the Net Asset Value Per Share (NAVPS).

Answer

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.

Question 2

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)?

Accepted Answer

$20.00

Answer

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.

Question 3

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?

Accepted Answer

A fund of funds

Answer

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).

Question 4

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?

Accepted Answer

Switches between different fund classes within the same corporation are generally not considered a taxable disposition.

Answer

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.

Question 5

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?

Accepted Answer

They will be charged a redemption fee, calculated as a percentage of the amount invested, which decreases the longer the fund is held.

Answer

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.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Mutual Fund Types and Structures Questions and Answers