FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client is interested in an investment that offers professional management, diversification, and liquidity, with shares purchased and redeemed directly from the fund at Net Asset Value (NAV). Which type of investment company BEST fits this description?
- AExchange-Traded Fund (ETF)
- BOpen-End Management Company
- CClosed-End Fund
- DUnit Investment Trust (UIT)
Show answer & explanationAnswer & explanation
Correct answer: B. Open-End Management Company
An open-end management company, commonly known as a mutual fund, offers professional management, diversification, and liquidity. Shares are continuously issued and redeemed by the fund itself at the end-of-day NAV.
Why the other options are wrong
- A. ETFs also trade on exchanges like stocks, and their prices fluctuate throughout the day, not necessarily at NAV.
- C. Closed-end funds trade on exchanges like stocks, and their prices are determined by supply and demand, not directly at NAV.
- D. UITs are unmanaged, fixed portfolios that typically terminate on a specified date, not offering continuous management or share redemption at NAV in the same way.
Open-End Management Company (Mutual Fund)
An open-end management company, commonly known as a mutual fund, is an investment company that continuously offers new shares and redeems existing shares at their Net Asset Value (NAV), typically calculated once per day after market close.
- Shares bought/sold directly from the fund.
- Price based on NAV.
- Continuously offered and redeemed.
- Professionally managed and diversified.
Memory trick: Open-End: Open for Business, Always NAV.