Series 6 > Mutual Funds and Investment Company Products > Flashcards

Mutual Funds and Investment Company Products Flashcards

Understand features, sales practices, and tax implications of mutual funds and investment company securities. (53 cards)

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1
Q

What are the three main types of investment companies?

A
  • Open-end funds
  • Closed-end funds
  • Unit investment trusts (UITs)
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2
Q

Fill in the blank:

______ funds issue a fixed number of shares and trade on stock exchanges.

A

Closed-end

Unlike open-end funds, closed-end funds do not continuously offer new shares. Instead, they are listed on exchanges where they trade like stocks, with prices determined by supply and demand.

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3
Q

How do unit investment trusts (UITs) differ from mutual funds?

A
  • UITs have a fixed portfolio
  • UITs have a set termination date
  • UITs are not actively managed
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4
Q

What is the primary characteristic of open-end investment companies?

A

They continuously issue and redeem shares at net asset value.

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5
Q

Fill in the blank:

A ______ ______ ______ is an investment company that offers a fixed portfolio of securities.

A

Unit Investment Trust

(UIT)

UITs are unique in that they provide a fixed, unmanaged portfolio of securities, typically bonds or stocks, and are designed to be held until maturity.

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6
Q

What are two key features of closed-end funds?

A
  • Fixed number of shares
  • Trade on stock exchanges
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7
Q

List the benefits of investing in mutual funds.

A
  • Diversification
  • Professional management
  • Liquidity
  • Convenience
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8
Q

Fill in the blank:

______ funds are known for having a set termination date and a fixed portfolio.

A

UIT

(Unit Investment Trust)

UITs do not actively manage their portfolio, and they have a specified end date when the trust is dissolved and proceeds are distributed to investors.

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9
Q

What is a common feature of all investment companies?

A

Pooling of investors’ money to invest in securities.

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10
Q

What are the three primary share classes of mutual funds?

A
  • Class A:
    • front-end load
    • lower ongoing fees
    • suitable for long-term investors
  • Class B:
    • back-end load (CDSC if sold early)
    • higher ongoing fees; converts to Class A after several years
    • suitable for long-term investors who cannot pay upfront
  • Class C:
    • level load with 12b-1 fees
    • no front- or back-end load if held for over a year
    • suitable for short- to medium-term investors
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11
Q

Fill in the blanks:

Class A shares typically involve a ______ ______ at the time of purchase.

A

front-end load

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12
Q

What is a back-end load?

A

A fee charged when shares are sold, also known as a contingent deferred sales charge (CDSC).

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13
Q

List the typical characteristics of Class B shares.

A
  • Back-end load (CDSC)
  • Converts to Class A after 6–7 years
  • Higher annual expenses
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14
Q

Fill in the blank:

Class C shares are characterized by level load with ______ fees.

A

12b-1

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15
Q

How do 12b-1 fees affect mutual fund expenses?

A

They increase the annual operating expenses of the fund.

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16
Q

What is the primary advantage of Class A shares over time?

A

Lower ongoing expenses compared to other classes.

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17
Q

Fill in the blank:

Class B shares convert to Class A shares after __-__ years.

A

6–7

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18
Q

What is a breakpoint in mutual fund investing?

A

A discount on the front-end load for large purchases of Class A shares.

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19
Q

Why might an investor choose Class C shares?

A

For short-term investments with no front- or back-end load.

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20
Q

Fill in the blank:

Mutual funds calculate their Net Asset Value (NAV) ______.

A

daily

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21
Q

What is the significance of the NAV in mutual fund transactions?

A

It determines the price at which shares are bought and sold.

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22
Q

What is the primary objective of a growth mutual fund?

Study These Flashcards
A

Capital appreciation

23
Q

Fill in the blank:

______ funds aim to provide both income and capital appreciation.

24
Q

List three characteristics of income funds.

Study These Flashcards
A
  • Focus on income generation
  • Invest in dividend-paying stocks and bonds
  • Generally lower risk than growth funds
25
What **type of mutual fund** is most suitable for an investor seeking **tax-free income**?
Municipal bond fund
26
# Fill in the blank: \_\_\_\_\_\_ funds invest primarily in foreign securities.
International
27
What is the **main risk** associated with sector funds?
Concentration risk
28
List two key features of **index funds**.
* Track a specific market index * Generally have lower expenses
29
# Fill in the blanks: \_\_\_\_\_\_ \_\_\_\_\_\_ funds invest in stocks that pay high dividends.
Equity income
30
What **type of mutual fund** is designed to **adjust its mix of investments** as it approaches a target date?
Target-date fund
31
List two **advantages** of investing in mutual funds.
* Professional management * Diversification
32
# Fill in the blanks: \_\_\_\_\_\_ \_\_\_\_\_\_ funds invest in short-term, high-quality securities.
Money market
33
What is the primary objective of a **bond fund**?
Income generation
34
What is the **tax treatment** for dividends received from mutual funds?
Taxed as ordinary income or qualified dividends. ## Footnote Dividends from mutual funds may qualify for lower tax rates if the underlying income is from qualified dividends. Otherwise, they are taxed at the investor's ordinary income tax rate.
35
# Fill in the blanks: Mutual fund capital gains distributions are typically taxed at the \_\_\_\_\_\_ \_\_\_\_\_\_ \_\_\_\_\_\_ rate.
long-term capital gains ## Footnote Even if the investor has held the mutual fund shares for less than a year, capital gains distributions are taxed at the long-term rate if the fund held the assets for more than a year.
36
How are **short-term capital** gains from mutual funds taxed?
As ordinary income ## Footnote Short-term capital gains occur when the mutual fund sells securities held for one year or less. These gains are passed to investors and taxed at their ordinary income tax rates.
37
What **form** do mutual funds issue to report **taxable income** to investors?
Form 1099-DIV ## Footnote Form 1099-DIV provides details on dividends and capital gains distributed to investors, which are necessary for preparing tax returns.
38
Are mutual fund **reinvested** dividends subject to taxation?
Yes ## Footnote Even if dividends are reinvested to purchase more shares, they are taxable in the year they are paid to the investor.
39
# Fill in the blank: Mutual funds must distribute at least \_\_\_\_\_\_% of their net investment income to avoid excise tax.
98 ## Footnote This requirement ensures that mutual funds distribute most of their income to shareholders, maintaining their tax status and avoiding additional taxes.
40
How are **foreign taxes** paid by mutual funds treated for U.S. investors?
As a **foreign tax credit** or deduction. ## Footnote Investors can choose to claim foreign taxes paid by the mutual fund as a credit against U.S. taxes or as a deduction from taxable income.
41
What is the **tax implication** of selling mutual fund shares at a loss?
Capital loss ## Footnote Capital losses from selling mutual fund shares can offset capital gains and up to $3,000 of other income annually, with the remainder carried forward to future years.
42
# Fill in the blank: Mutual funds report capital gains distributions on \_\_\_\_\_\_.
Schedule D ## Footnote Investors use Schedule D to report capital gains and losses, including those from mutual fund distributions, on their tax returns.
43
What is the '**wash sale**' rule in relation to mutual funds?
Disallows a loss deduction if identical shares are purchased **within 30 days**. ## Footnote The wash sale rule prevents investors from claiming a tax deduction for a loss when they repurchase the same or substantially identical securities within 30 days before or after the sale.
44
What is a **breakpoint** in mutual fund sales?
**Discounts** on front-end sales charges based on the amount invested. ## Footnote Breakpoints encourage larger investments by reducing the sales charge percentage as the investment amount increases. They are available primarily for Class A shares.
45
# Fill in the blanks: A Letter of Intent (LOI) allows an investor to receive \_\_\_\_\_\_ \_\_\_\_\_\_ on future purchases by promising to invest a certain amount over a specified period.
breakpoint discounts ## Footnote An LOI is typically valid for up to 13 months and can be backdated 90 days to include previous purchases. If the commitment is not met, the investor may have to pay the difference in sales charges.
46
List the **benefits** of using a **Letter of Intent** (LOI) in mutual fund investments.
* Immediate access to breakpoint discounts * Flexibility to reach investment goals over time * Potential for reduced sales charges ## Footnote An LOI is a non-binding agreement, meaning the investor is not legally obligated to complete the investment. However, failure to meet the terms may result in retroactive charges.
47
How does a **Right of Accumulation** (ROA) benefit mutual fund investors?
Allows investors to **combine current and prior investments** to qualify for breakpoints. ## Footnote ROA can include investments across accounts owned by the same investor or family members, enhancing the ability to reach breakpoints and reduce sales charges.
48
# Fill in the blank: Breakpoints apply primarily to \_\_\_\_\_\_ shares of mutual funds.
Class A ## Footnote Class A shares often have front-end sales charges, which can be reduced through breakpoints, making them appealing for long-term, large investments.
49
What is the **primary purpose** of breakpoint sales practices?
To **encourage larger investments** by reducing sales charges. ## Footnote Breakpoint sales practices are designed to benefit both the investor, through lower costs, and the fund, through increased assets.
50
What happens if an investor **fails to fulfill an LOI** in mutual fund investments?
They may have to **pay the difference** in sales charges. ## Footnote If the investment commitment under an LOI is not met, the investor is typically charged the higher sales charge that would have applied without the LOI.
51
List factors that determine eligibility for breakpoints in mutual fund purchases.
* Total amount invested * Type of mutual fund share class * Family or household account aggregation ## Footnote Eligibility for breakpoints can also consider related accounts, such as those held by a spouse or minor children, to maximize discounts.
52
What is the role of the **fund prospectus** in sales practices related to breakpoints?
It outlines the **terms and conditions** for breakpoint eligibility. ## Footnote The prospectus provides detailed information on sales charges, breakpoints, and any conditions that must be met, ensuring transparency for investors.
53
# Fill in the blanks: Mutual fund investors can use \_\_\_\_\_\_ \_\_\_ \_\_\_\_\_\_ to combine investments across accounts and qualify for breakpoints.
Rights of Accumulation | (ROA) ## Footnote ROA allows investors to leverage their total investment across different accounts to reach breakpoints, thereby reducing overall sales charges.
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