CFS Mutual Funds & ETFs Flashcards

What is 'style drift' in mutual fund management?

Answer: When a fund deviates from its stated investment objective or style category

Style drift occurs when a fund manager invests outside the fund's stated mandate (e.g., a large-cap fund buying small-cap stocks), which can disrupt an investor's intended asset allocation.

The 'expense ratio' of a mutual fund represents:

Answer: The annual cost of operating the fund expressed as a percentage of average net assets

The expense ratio is the annual percentage of fund assets used to cover operating costs including management fees, administrative expenses, and 12b-1 fees.

What is a 'breakpoint' in mutual fund sales charges?

Answer: A discount on front-end sales loads available when investing above certain dollar thresholds

Breakpoints are volume discounts on Class A share sales loads that reduce the percentage charged as the investment amount reaches certain thresholds.

What is the 'creation/redemption' mechanism that makes ETFs tax-efficient?

Answer: Authorized participants exchange baskets of securities for ETF shares, avoiding taxable sales

Authorized participants create or redeem ETF shares by exchanging baskets of the underlying securities in-kind, which avoids triggering capital gains distributions.

A mutual fund's 'turnover rate' measures:

Answer: The percentage of fund holdings replaced through buying and selling during the year

Turnover rate indicates how actively the fund manager trades the portfolio; high turnover generally leads to higher transaction costs and potential tax distributions.

Which mutual fund category is best described as investing in both stocks and bonds to provide growth and income?

Answer: Balanced fund

Balanced funds maintain a mix of equities and fixed income securities, typically in a set ratio, aiming to provide both capital appreciation and income.