Chapter 17: Mutual Funds - Structure and Regulation

Question 1

A pool of capital gathered to buy securities according to a specific investment mandate. Fund is managed by an investment professional that is paid a management fee to carry it out

Answer 1

Managed products

Question 2

Document that generally discloses the degree of risk, the main types of securities held in its portfolio, and the historical returns it earned, among other things

Answer 2

Fund Facts document

Question 3

Continually managed by a fund manager who is an investment specialist. Analyze the financial markets and select securities that best match a particular fund’s investment objectives

Answer 3

Low-cost professional managment

Question 4

Allows small investors to acquire a diversified portfolio, the fund sponsor enjoys economies of scale, wider range of securities they otherwise wouldn’t have access to

Answer 4

diversification

Question 5

Enables investors to meet a wide variety of objectives. Can also permit investors to transfer between two or more different funds managed by the same sponsor, or permitted between different purchase plans under the same fund

Answer 5

Variety of types and transferability of funds

Question 6

They can make one time lump sum payments or they can make regular purchases in small amounts under a pre-authorized contribution plan

Answer 6

Flexible purchase and redemption options

Question 7

Have continuing rights to redeem units or shares for cash at NAVPS

Answer 7

Liquidity

Question 8

Shares in a deceased person’s mutual fund continue to be professionally managed during the probate period until estate assets are distributed, when other securities are not.

Answer 8

ease of estate planning

Question 9

Fund shares can be accepted as a security for a bank loan. Are also acceptable for margin purposes, thus giving aggressive fund buyers the benefit of leverage in their financial planning

Answer 9

loan collateral and margin eligibility

Question 10

Sponsors of mutual funds file a variety of reports annually to meet their disclosure requirements. Includes the Annual Information Form (AIF), audited annual and interim financial statement statements, and an annual report

Answer 10

Regulatory filing

Question 11

Most funds emphasize a long-term investment horizon and are generally unsuitable for investors wanting short term gains. Mutual fund companies also generally charge an early redemption fee to discourage short-term trading

Answer 11

Short-term unsuitability

Question 12

Mutual funds can lose value in falling markets, volatility is not controllable by the fund managers

Answer 12

Systematic risk

Question 13

Purchases and sales made by the fund manager creates a series of taxable events that may not suit the unit holder’s time horizon

Answer 13

tax complications

Question 14

The most common structure for a mutual fund. The trust deed establishing the open-end fund covers such things as the fund’s principal investment objectives, policy, and any restrictions on investments. Investors in open-end mutual funds receive units at a price that is the same as or close to the fund’s current NAVPS

Answer 14

Mutual funds structured as a trust

Question 15

Lack the flow-through status of investment fund trusts, however the corporation can achieve a virtually tax-free status by declaring dividends throughout the year that are equivalent to the corporation’s net income after fees and expenses. Must meet conditions of the Income Tax Act

Answer 15

mutual funds structured as a corporation

Question 16

NAVPS formula

Answer 16

Total Assets - Total Liabilities / total number of shares or units outstanding

Question 17

Many mutual funds, primarily those offered by direct distribution companies, banks, and trust companies, have no sale charges when investors purchase or redeem units

Answer 17

no-load funds

Question 18

Payable to the distributor at the time the units are purchased, usually a percentage of purchase price. Effectively reduces the actual amount invested, which makes the overall offering price higher than the NAVPS

Answer 18

front-end load funds

Question 19

Front-end load formula

Answer 19

Offering Price = NAVPS / 100% - Sales Charge

Question 20

Payable to the distributor at the time of redemption or sale of fund. Decrease the longer the investor holds the fund

Answer 20

back-end load

Question 21

Back-end load formula (original purchase amount)

Answer 21

Selling/redemption price = NAVPS - Sales commission
Selling/redemption price = NAVPS - (NAVPS * Sales Percentage)

Question 22

back end load formula (NAVPS at time of redemption)

Answer 22

NAVPS - NAVPS at current time * sales commission

Question 23

A mutual fund manager may pay this fee to the mutual fund sales representative who sold the fund, as long as the client holds the funds

Answer 23

trailer fees/service fees

Question 24

Fee that applies when the fund is redeemed within 90 days of initial purchase

Answer 24

Early redemption fees

Question 25

May apply when an investor changes units of one fund to another in the same family or fund company

Answer 25

switching fees

Question 26

management expense ratio formula (MER)

Answer 26

Aggregate Fees and Expenses Payable During the year / net asset value for the year * 100

Question 27

Fee based fund with low MER. Charged a percentage of the assets rather than a commission fee for each transaction

Answer 27

F-class funds

Question 28

Deals with mutual fund prospectus and Fund Facts disclosure.

Answer 28

NI 81-101

Question 29

Contains requirements and guidelines for the distribution and advertising of mutual funds

Answer 29

NI 81-102

Question 30

Normally shorter and simpler than a typical prospectus, must be filed annually unless there is a change in the affairs of the mutual fund

Answer 30

simplified prospectus

Question 31

Provides introductory information about the mutual fund, information about mutual funds in general, and information applicable to funds managed by mutual fund

Answer 31

Part A of simplified prospectus

Question 32

Contains detailed information about the specific mutual fund

Answer 32

Part B of simplified prospectus

Question 33

Form that contains significant holdings in other issuers, tax status of issuer, directors, officers, and trustees of the fund and their indebtedness and remuneration, associated persons, principal holders of securities, and the interests of management and others in material transactions, and the particulars of any material contracts entered into by issuer

Answer 33

Annual Information Form (AIF)