Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksMedium
A customer is looking for an investment that offers professional management, diversification, and the ability to redeem shares at the end of the trading day for their net asset value (NAV). Which of the following would be most suitable?
- AExchange Traded Fund (ETF)
- BClosed-End Fund
- CMutual Fund (Open-End Fund)
- DUnit Investment Trust (UIT)
Show answer & explanationAnswer & explanation
Correct answer: C. Mutual Fund (Open-End Fund)
Mutual funds (open-end funds) are characterized by professional management, diversification, and the ability for investors to redeem their shares directly from the fund at the current day's Net Asset Value (NAV) at the end of the trading day. ETFs and Closed-End Funds trade on exchanges and their prices fluctuate throughout the day.
Why the other options are wrong
- A. ETFs trade on exchanges throughout the day, and their price can deviate from NAV.
- B. Closed-end funds trade on exchanges, and their price can deviate from NAV; they are not redeemable from the fund.
- D. UITs are unmanaged, fixed portfolios, and while redeemable, they don't offer ongoing professional management of the portfolio composition.
Mutual Fund Characteristics
An investment vehicle that pools money from many investors to purchase a diversified portfolio of securities, managed by a professional fund manager.
- Professionally managed.
- Offers diversification.
- Shares are redeemable at NAV at the end of the trading day.
- Open-end funds, continuously issue and redeem shares.
Memory trick: Mutual Funds Make Money Many Monthly.