FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client is interested in an investment that offers professional management, diversification, and liquidity, where shares are continuously offered and redeemed at Net Asset Value (NAV). Which type of investment company best fits this description?
- AUnit investment trust (UIT)
- BClosed-end fund
- COpen-end management company (Mutual Fund)
- DExchange-traded fund (ETF)
Show answer & explanationAnswer & explanation
Correct answer: C. Open-end management company (Mutual Fund)
An open-end management company, commonly known as a mutual fund, continuously offers new shares and redeems existing shares at their Net Asset Value (NAV). They provide professional management and diversification.
Why the other options are wrong
- A. Unit investment trusts are unmanaged and have a fixed portfolio, expiring on a set date or when units are redeemed.
- B. Closed-end funds have a fixed number of shares that trade on an exchange, often at a premium or discount to NAV, and are not continuously offered/redeemed by the fund.
- D. ETFs trade on exchanges like stocks, not continuously offered/redeemed at NAV by the fund, though they do offer diversification and liquidity.
Open-End Management Company (Mutual Fund)
An investment company that continuously offers new shares and redeems existing shares at their current Net Asset Value (NAV).
- Professionally managed portfolio of securities.
- Provides diversification for investors.
- Shares are bought from and sold back to the fund itself.
- NAV is calculated daily at the close of trading.
Memory trick: Mutual funds are 'open' to continuous buying and selling.