FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client is considering an investment that pools money from many investors to purchase a diversified portfolio of securities. The investment is professionally managed, issues redeemable shares, and its Net Asset Value (NAV) is calculated daily. Which type of investment company best fits this description?
- AOpen-End Management Company
- BClosed-End Fund
- CUnit Investment Trust (UIT)
- DExchange-Traded Fund (ETF)
Show answer & explanationAnswer & explanation
Correct answer: A. Open-End Management Company
Open-end management companies, commonly known as mutual funds, are characterized by issuing redeemable shares, professional management, daily NAV calculation, and continuous offering of new shares.
Why the other options are wrong
- B. Closed-end funds have a fixed number of shares that trade on exchanges, not redeemable.
- C. UITs are unmanaged and have a fixed portfolio, expiring on a set date.
- D. ETFs trade on exchanges, are not redeemable with the fund, and their market price can differ from NAV.
Open-End Management Company (Mutual Fund)
An open-end management company, or mutual fund, is an investment company that continuously offers new shares and redeems existing shares at their Net Asset Value (NAV). They are professionally managed and invest in a diversified portfolio of securities.
- Shares are 'open-ended' – continuously issued and redeemed by the fund.
- NAV is calculated daily at the close of trading.
- Shares are purchased from and redeemed with the fund itself, not on an exchange.
- Always professionally managed and diversified.
Memory trick: Open-end means 'open' to new money, 'redeemable' at NAV.