Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A retail investor is looking to invest in a security that provides a diversified portfolio of stocks or bonds, is actively managed, and typically has a net asset value (NAV) calculated at the end of each trading day. This investor should consider a(n):
- AUnit Investment Trust (UIT)
- BMutual Fund (Open-End Fund)
- CClosed-End Fund
- DExchange-Traded Fund (ETF)
Show answer & explanationAnswer & explanation
Correct answer: B. Mutual Fund (Open-End Fund)
Mutual funds (open-end funds) are characterized by continuous offerings of shares, active management, diversification, and their NAV being calculated once daily at the close of trading. ETFs, Closed-End Funds, and UITs have different structures for trading and pricing.
Why the other options are wrong
- A. UITs have a fixed portfolio, no active management, and shares are redeemable directly with the trust.
- C. Closed-end funds have a fixed number of shares, trade on exchanges, and their price can deviate from NAV.
- D. ETFs trade like stocks throughout the day and are typically passively managed to track an index.
Mutual Fund (Open-End Fund)
A mutual fund, or open-end fund, is an investment company that pools money from many investors to invest in a diversified portfolio of securities. Shares are continuously offered and redeemed, and priced at Net Asset Value (NAV) once daily.
- Continuously issues and redeems shares.
- Priced at NAV once daily (end of day).
- Typically actively managed.
- Offers diversification and professional management.
Memory trick: Mutual Fund: 'Many' shares, 'Managed' daily NAV.