Funds, Characteristics, Suitability Flashcards
What is the primary function of a Direct Participation Program (DPP) Limited Partnership?
Distributes passive income and passive losses to its partners
What potential financial benefits can a DPP Limited Partnership provide?
May provide tax deductions and tax credits
What type of liability does a DPP Limited Partnership offer to its limited partners?
Limited liability
What is a key characteristic of the liquidity of DPP Limited Partnerships?
Illiquid and subject to the adverse effects of tax law changes
What risk is associated with the tax benefits of a DPP Limited Partnership?
Risk of IRS recapturing tax benefits
Who is a DPP Limited Partnership suitable for?
Investors who are able to afford significant risks and commit capital for the long term
Fill in the blank: A Direct Participation Program (DPP) Limited Partnership offers _______ to limited partners.
[limited liability]
True or False: A DPP Limited Partnership is a liquid investment.
False
What should investors consider regarding the risks of a DPP Limited Partnership?
Significant risks and long-term capital commitment
What is a Mutual Fund?
Offers shares of a portfolio that’s diversified based on the type of fund
What is a key advantage of investing in a Mutual Fund?
Less risky and easier than buying individual securities
When is a Mutual Fund priced?
Priced once per day (forward pricing)
How does a Mutual Fund redeem shares?
Fund will redeem shares at NAV; there’s no secondary market
What factors determine the suitability of a Mutual Fund?
Varies based on objectives and share class
Who is a Mutual Fund suitable for?
Investors seeking to invest in a diversified portfolio of securities rather than creating their own
What is a Growth Fund?
A managed portfolio consisting of common stocks which have strong upside potential
Growth funds typically focus on capital appreciation rather than income generation.
What type of dividends may a Growth Fund pay?
May pay little or no dividends
Growth funds prioritize reinvesting earnings for growth over paying dividends.
What determines the risk of a Growth Fund?
Risk is determined by types of companies included (large-, mid-, small-cap)
Different cap sizes can lead to varying levels of volatility and risk.
Who is a Growth Fund suitable for?
Suitable for investors willing to accept the risk associated with long-term growth
These investors typically seek capital appreciation and are prepared for market fluctuations.
What is an Income Fund?
A managed portfolio that primarily consists of bonds, preferred stocks, and possibly high dividend paying common stocks
Income Funds are designed to provide current income to investors.
How does the price volatility of an Income Fund compare to growth funds?
The price is less volatile than growth funds
This characteristic makes Income Funds potentially less risky for investors.
What type of yield do Income Funds typically offer?
A high dividend yield
This makes them attractive to investors looking for income.
Who are Income Funds suitable for?
Investors seeking current income
These funds are particularly appealing to those who prioritize income over capital growth.
What is a Specialized/Sector Fund?
A managed portfolio that invests in one specific industry or geographic area
What is the diversification level of a Specialized/Sector Fund?
The least diversified type of fund
What kind of risk is associated with Specialized/Sector Funds?
Higher risk with higher potential returns
Who is a Specialized/Sector Fund suitable for?
Aggressive investors who are seeking a higher return
What is a Balanced Fund?
A diversified and managed portfolio that consists of both stocks and bonds
What are the two primary benefits of a Balanced Fund?
Growth and current income
Who is a Balanced Fund suitable for?
Conservative investors seeking both long-term growth and current income
What is an International Stock Fund?
A managed portfolio that consists of stocks of foreign corporations.
In what currency are shares of an International Stock Fund priced?
U.S. dollars.
In what currency are dividends paid for an International Stock Fund?
U.S. dollars.
Who is an International Stock Fund suitable for?
Investors seeking to diversify into foreign stocks.
What is an Index Fund?
A passively managed fund that buys and holds securities that mirror a specific index (e.g., the S&P 500)
Index funds aim to replicate the performance of a specific market index.
What is a key characteristic of Index Funds?
Low expense ratio
This makes them a cost-effective investment option.
Who are Index Funds suitable for?
Investors seeking a low-cost alternative to more actively managed funds with similar objectives
They are ideal for those looking for a simple and effective investment strategy.
What is an Exchange Traded Fund (ETF)?
Offers shares that track an index and trade in the secondary market like common stock
How do ETFs differ from mutual funds?
Shares are priced and traded in real-time on an exchange
Can ETFs be sold short?
Yes, ETFs may be sold short and purchased on margin
What are the variations of ETFs?
High risk leveraged and inverse ETFs
What type of investment are traditional ETFs suitable for?
Low cost and long-term investment (like mutual funds)
What type of trading are non-traditional ETFs suitable for?
Short-term trading and speculation
Fill in the blank: ETFs may be sold short and purchased on _______.
margin
True or False: Shares of ETFs are not traded in real-time.
False
What is a key characteristic of traditional ETFs?
They are suitable as a low cost and long-term investment
What are leveraged and inverse ETFs considered?
Non-traditional ETFs
What does ETN stand for?
Exchange Traded Note
How is an ETN similar to an ETF?
Both are traded on exchanges and can provide exposure to various assets.
What type of debt is an ETN considered?
Unsecured debt
What risk is associated with ETNs?
Default risk
What types of assets do ETNs often track?
Exotic mix of assets such as foreign stocks and illiquid markets
Can ETNs be sold short?
Yes
Can ETNs be purchased on margin?
Yes
Who might find ETNs suitable?
Investors seeking diversification and those looking for speculative investments
Fill in the blank: An ETN is considered _______.
unsecured debt
True or False: ETNs have no associated default risk.
False
What is a Closed End Fund?
Issues a limited number of shares which are priced and traded in real-time
Are shares of a Closed End Fund redeemable?
No, shares are not redeemable
How is the share price of a Closed End Fund determined?
Set in market by supply and demand, not based on NAV
What type of investors is a Closed End Fund suitable for?
Investors seeking to invest in a diversified portfolio with short-term trading capabilities
What is a similarity between Closed End Funds and ETFs?
Both allow for short-term trading capabilities
Fill in the blank: A Closed End Fund’s share price is influenced by _______.
supply and demand
What is a Business Development Company (BDC)?
A registered closed-end investment company that invests in developing companies.
What types of companies do BDCs typically invest in?
Often private companies and startups that are not available to the average investor.
How does the volatility of BDCs compare to mutual funds?
More volatile than most mutual funds.
What is the potential reward of investing in BDCs?
High potential reward.
Who is the ideal investor for BDCs?
Aggressive investors who can withstand short-term volatility.
Fill in the blank: BDCs are suitable for those seeking an investment that is often only available to large _______ funds.
private equity
What type of returns are investors seeking from BDCs?
High dividends.
What is a Real Estate Investment Trust (REIT)?
A portfolio consisting of income producing properties and/or mortgages
What percentage of net income does a REIT distribute to investors?
90%
Does a REIT distribute losses to investors?
No
How are dividends from a REIT taxed?
As ordinary income (non-qualified)
Is a REIT considered an investment company?
No
Who is a REIT suitable for?
Investors seeking high dividend yield and willing to accept price volatility
Fill in the blank: A REIT distributes _______ of its net income to investors.
90%
True or False: A REIT is required to distribute losses to its investors.
False
What type of income do REIT dividends represent for tax purposes?
Ordinary income (non-qualified)
What is a key characteristic of the properties held by a REIT?
They must be income producing
What is a Hedge Fund?
A private investment fund that’s not subject to the Investment Company Act of 1940.
What types of strategies may Hedge Funds use?
Exotic strategies that involve short selling, leverage, and derivatives.
Do Hedge Funds publish their daily NAV?
No, they do not publish their daily NAV.
What is a key characteristic of Hedge Funds regarding liquidity?
They are illiquid.
Who are Hedge Funds suitable for?
Sophisticated investors who can afford the increased risk and potential loss of capital.
What must investors be able to do when investing in Hedge Funds?
Tie up funds for the long-term.
What is a Variable Annuity?
An investment contract with an insurance company
Who assumes the risk in a Variable Annuity?
The annuitant
What can a Variable Annuity be set up to provide?
Periodic payments for life
What is the tax treatment of income in a Variable Annuity?
Income grows tax-deferred until paid out
What factors determine the risk and return in a Variable Annuity?
The investments chosen in the separate account
What may be adjusted in a Variable Annuity to suit the investor?
Investments may be adjusted to suit the investor’s age and risk profile
Who is a Variable Annuity suitable for?
Investors seeking tax-deferred retirement savings or the potential for lifetime payments
Fill in the blank: A Variable Annuity is an investment contract with an _______.
insurance company
True or False: The income from a Variable Annuity is taxed immediately.
False
What type of payments can a Variable Annuity provide?
Periodic payments for life
What is a Fixed Annuity?
An investment contract with an insurance company
Who assumes the risk in a Fixed Annuity?
The insurance company
What type of payments may a Fixed Annuity provide?
Fixed payments for life
How does income from a Fixed Annuity grow?
Tax-deferred until paid out
What is the nature of the investment return in a Fixed Annuity?
At a fixed rate
Who is a Fixed Annuity suitable for?
Investors seeking lifetime income payments after retirement
What is an important consideration regarding the fixed rate of return in a Fixed Annuity?
It may not keep up with inflation
Fill in the blank: A Fixed Annuity provides income that grows _______ until paid out.
tax-deferred
True or False: A Fixed Annuity guarantees a variable rate of return.
False
What is one potential downside of a Fixed Annuity for investors?
The fixed rate of return may not keep up with inflation
What is an Individual Retirement Account (IRA)?
A tax deferred investment account
Who can fund an IRA?
Persons with earned income
How are withdrawals from an IRA taxed?
As ordinary income
What penalty is assessed for early withdrawal from an IRA?
A penalty is assessed
What does RMD stand for in relation to an IRA?
Required Minimum Distribution
Who is the IRA suitable for?
Persons with earned income who are saving for retirement
What is a Roth IRA?
A tax-free investment account available to persons with earned income.
Who is eligible to contribute to a Roth IRA?
Persons with earned income below certain income limits.
What happens to qualified withdrawals from a Roth IRA?
They are tax-free.
Is there a penalty for early withdrawal from a Roth IRA?
Yes, a penalty is assessed for early withdrawal.
Does the required minimum distribution (RMD) apply to Roth IRAs?
No, RMD doesn’t apply.
Who is a Roth IRA suitable for?
Persons with earned income below the limit who are saving for retirement and want future tax-free withdrawals.
Fill in the blank: A Roth IRA is a _______ investment account.
tax-free
True or False: High-income persons can contribute to a Roth IRA.
False
What does CESA stand for?
Coverdell Education Saving Account
What is the primary purpose of a CESA?
To help pay a child’s education expenses
Are contributions to a CESA subject to income limits?
Yes
What type of withdrawals are tax-free from a CESA?
Withdrawals used for qualified education expenses
At what levels of education can CESA funds be used?
At any level of education
What happens if CESA funds are not used for education?
Penalties and taxes are assessed
Is a change of beneficiary allowed in a CESA?
Yes
What is a 529 College Savings Plan?
A tax-free investment account established to help pay higher education expenses and private school tuition.
What are the tax benefits of a 529 College Savings Plan?
Withdrawals are tax-free if used for qualified education expenses.
Are there any income limits for contributors to a 529 College Savings Plan?
No income limits are imposed on contributors.
What happens if funds from a 529 College Savings Plan are not used for education?
Penalties and taxes are assessed.
Can the beneficiary of a 529 College Savings Plan be changed?
Yes, a change of beneficiary is allowed.
Who is a 529 College Savings Plan suitable for?
Investors saving for a child’s education expenses, including elementary, secondary, or higher education.
What is the maximum amount that can be used from a 529 College Savings Plan for private school tuition per year?
$10,000 per year.
Fill in the blank: A 529 College Savings Plan is suitable for investors saving for a child’s _______ expenses.
[education]
True or False: Withdrawals from a 529 College Savings Plan are tax-free for any purpose.
False
