IFC Mutual Fund Types and Structures 2 — Questions and Answers
Question 1: Which type of mutual fund continuously issues and redeems units at the current net asset value per unit (NAVPU)?
- Closed-end fund
- Open-end fund (Correct answer)
- Exchange-traded fund
- Segregated fund
Correct answer: Open-end fund
Open-end mutual funds continuously issue new units and redeem existing units at the daily calculated NAVPU.
Question 2: A labour-sponsored investment fund (LSIF) is designed primarily to invest in:
- Government bonds and treasury bills
- Small and medium-sized businesses (Correct answer)
- International equity markets
- Real estate investment trusts
Correct answer: Small and medium-sized businesses
LSIFs are structured to provide venture capital to small and medium-sized Canadian businesses and offer tax credits to investors.
Question 3: What distinguishes a clone fund from a standard mutual fund?
- It invests exclusively in domestic equities
- It mirrors the performance of a foreign fund using derivatives (Correct answer)
- It holds a fixed portfolio that never changes
- It is sold only to institutional investors
Correct answer: It mirrors the performance of a foreign fund using derivatives
Clone funds replicate the returns of a foreign fund by using derivative contracts while technically remaining a Canadian fund.
Question 4: Under a mutual fund trust structure, unitholders are treated as:
- Shareholders of a corporation
- Beneficiaries of the trust (Correct answer)
- Limited partners in a partnership
- Creditors of the fund
Correct answer: Beneficiaries of the trust
In a mutual fund trust, investors are beneficiaries who hold units representing their proportionate interest in the trust's assets.
Question 5: Which of the following best describes a money market mutual fund?
- It invests in long-term corporate bonds for high yield
- It holds short-term, high-quality debt instruments to preserve capital (Correct answer)
- It tracks a broad stock market index
- It provides exposure to foreign currency markets
Correct answer: It holds short-term, high-quality debt instruments to preserve capital
Money market funds invest in short-term, highly liquid instruments such as T-bills and commercial paper to maintain capital stability.
Question 6: A fund-of-funds structure is one where:
- Two or more funds merge into a single portfolio
- A mutual fund invests its assets in units of other mutual funds (Correct answer)
- A fund splits into multiple classes
- A fund invests only in its own shares
Correct answer: A mutual fund invests its assets in units of other mutual funds
A fund-of-funds invests in a portfolio of other mutual funds rather than directly in securities, providing built-in diversification.
Question 7: Which feature is unique to a closed-end fund compared to a standard open-end mutual fund?
- It calculates NAVPU daily
- Its units trade on a stock exchange at market prices (Correct answer)
- It must redeem units on demand at NAVPU
- It charges a management expense ratio
Correct answer: Its units trade on a stock exchange at market prices
Closed-end funds issue a fixed number of units that trade on a stock exchange, and their market price may differ from NAVPU.
IFC Mutual Fund Types and Structures 2
Which type of mutual fund continuously issues and redeems units at the current net asset value per unit (NAVPU)?