Chapter 18: Mutual Funds - Types and Features

Question 1

All assets are invested in cash, cash equivalent securities, and short-term debt securities with an approved credit rating. Least risky fund, must maintain minimum weighting of 95% in cash/cash equivalents, main risk is interest rate risk

Answer 1

Money Market Funds

Question 2

Designed to provide steady stream of income and safety of principal. Must have 95% of their non-cash assets in fixed income securities, primary source of risk is interest rate risk, also exposed to default or credit risk.

Answer 2

Fixed-income funds

Question 3

Invest in both stocks and bonds to provide a balanced mix of income and capital growth. Can hold a range of 5% - 90% in equities and 10%-95% in fixed-income, subject to market and interest rate risk.

Answer 3

Balanced Funds

Question 4

Must invest a minimum if 90% of their non-cash assets in equity securities. Main objective is long-term capital growth, and they range greatly in degree of risk and growth potential. Subject to market risk and sometimes, foreign exchange rate risk.

Answer 4

Equity Funds

Question 5

Some Canadian equity funds limit investments to companies with capitalization below those of the hundred largest Canadian companies. They offer opportunities that theoretically differ from general equity funds, and usually do not pay dividends.

Answer 5

Small cap/mid cap equity funds

Question 6

Provide tax-advantaged income with some possibility of capital appreciation by investing in preferred shares as well as high-quality common shares, with a history of consistently paying dividends. Riskier than bond funds but less risky than equity funds

Answer 6

Dividend funds

Question 7

Must either invest in physical commodities or gain exposure to commodities through use of derivatives

Answer 7

commodity funds

Question 8

Narrowly focused funds that do not fit easily into any of the broader categories, that include retail venture capital, alternative strategies, and miscellaneous things (property, leveraged, geographic, sector). Willing to forgo broad market diversification in the hope of above average returns, carry substantial concentration risk.

Answer 8

Specialty Funds

Question 9

Structured on the assumption that risk tolerance declines as investors grow older. Have a target date and a glide path, that refers to the changes in the fund’s asset mix over time.

Answer 9

Target-date funds

Question 10

Employ alternative strategies such as short selling or other forms of leverage. May use speculative or hedging strategies

Answer 10

Alternative Funds

Question 11

Sets out to match the performance of a broad market index. Categorized under the asset class they tend to replicate. Intends to provide long term growth of capital. Subject to market risk

Answer 11

Index Funds

Question 12

Passive style that constitute/replicate the performance of a market benchmark. Low cost, long term, buy and hold strategy, with no need to conduct individual securities analysis

Answer 12

Indexing

Question 13

Doesn’t replicate market exactly, but sticks fairly closely to the market weightings by industry sector, country/region, or by average market cap

Answer 13

Closet Indexing