10.5 Characteristics of Mutual Funds and the Mutual Fund Concept

...

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? -- A large-cap growth fund. --A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. --This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index.

...

Which of the following information should a registered representative obtain from a prospective client to ensure suitable investment recommendations? -Liquidity needs. -Number of dependents. Only information relevant to a prospective customer's investment needs and objectives is required to ensure suitable recommendations.

...

--Because the portfolio of the registered fund consists of shares of nonregistered hedge funds, virtually all of the risks associated with hedge funds are transferred to the mutual fund. --Funds of hedge funds allow all investors, not just accredited investors, to have access to hedge fund investments, and they are likely to have lower initial investment requirements, making that access even easier. --To divest of fund of hedge fund shares, the issuer would have to redeem them from the investor, as is the case with all registered mutual funds.

...

--Bond funds will distribute taxable income or dividends unless invested in municipal bonds. --Although dividend distributions from a municipal bond fund are tax exempt, capital gains distributions are fully taxable.

...

--Control over the investments in the portfolio is given to the investment manager, not to the individual investors.

...

--Disclosing material information about an investment is a registered representative's responsibility; ALL of the other choices are potential violations. -- recommending a specific investment to a seminar audience of prospective clients. -- recommending investments to be purchased in a joint account while having suitability information on only one of the owners. -- recommending a municipal bond investment over a corporate bond without knowing the client's tax status.

...

--Each mutual fund shareholder owns an undivided interest in the investment company's portfolio. --Because each share represents one class of voting stock, the investor's interest in the fund is reflected by the number of shares owned.

...

--Growth funds invest chiefly in common stock -- Historically, common stock provides greater protection from inflation than debt securities do.

...

--High-yield income funds usually invest in low-rated bonds; --income bonds do not pay interest unless the board of directors declares a payment. --An insured short-term municipal bond mutual fund is relatively safe, very liquid, and provides income free from federal tax.

...

--Interest on money market instruments is not guaranteed or specified. --Money market funds are typically no-load funds with no redemption fee, but investors do pay a management fee. --The dividends earned on an investor's shares are accrued daily.

...

--Lifecycle or target date funds are managed in such a way as to lessen the amount of risk associated with the portfolio as it gets closer to its target date, --which is usually the anticipated time of retirement for the fund investor.

...

--Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. --They are offered without a sales load or charge. --The principal objective of the fund is to maintain a stable NAV ($1 per share). --Beta is a measure of volatility; money market funds have low betas.

...

--Municipal bond funds distribute federally tax-free dividends, but any capital gain distribution is subject to taxation. --the tax preferential treatment of municipal bonds is limited to the interest income earned, not the gains.

...

--Municipal bonds are considered second only to U.S. government securities in terms of safety. --Also, interest received from the bonds is generally exempt from federal income tax.

...

--Preferred stock generates current income in the form of dividends. --Aggressive growth funds strive for capital appreciation rather than current income. --Money market funds have low yields, not the high yields that an income investor wants. --high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

...

--Special situation funds buy securities of companies that are considered to be in a position to benefit from special nonrecurring situations. --Those could be; new management, new products, patents pending, takeover or turnaround situations.

...

--The longer a bond's maturity, the greater the risk to the investor. --As a result, long-term bonds generally pay higher interest rates than medium- or short-term bonds. -- If a fund replaces medium-term bonds with long-term bonds, the bonds would pay higher interest rates and thus generate more income. -- Additionally, as interest rates increase, so do yields.

...

--This fund is invested in both stock and bonds; it is a balanced fund. --The percentage invested in the two types of securities is adjusted to maximize the yield obtained; --percentages are seldom fixed and are usually at the discretion of the investment adviser.

10.5.1.1.2

--Utilities are defensive industries; they tend to pay dividends consistently.

...

Each of the following is a characteristic of money market funds: -- Portfolio of short-term debt instruments . -- Offered without a sales load . -- Stable NAV.

...

If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend? -GROWTH FUND --A growth mutual fund invests in stocks that are growing rapidly and stresses capital appreciation rather than income. --The key is that the growth and appreciation are synonymous.

...

If a couple has a long-term growth objective and is willing to accept a reasonable amount of risk, which of the following mutual funds is most suitable for them? A) Money market fund. B) Corporate bond fund. C) Municipal bond fund. *****Common stock fund. ***** --A common stock fund will help the couple meet their long-term growth objective.

...

If a married couple with a long-term growth objective is considering a mutual fund and they are concerned about the fund's annual expenses, they should select a: A) common stock fund with a high portfolio turnover. B) long-term corporate bond fund. C) preferred stock fund. ***** common stock fund with a low portfolio turnover. ****** ---Of the choices given, common stock is the only vehicle capable of providing long-term growth. --Preferred stock will provide dividends, but it will not provide much growth as it trades like a bond in line with interest rate changes. --Of the two common stock funds, the one with the lower portfolio turnover will have lower annual expenses.

...

If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable? --A specialized or sector fund invests 25% or more of its assets in a particular region or industry

...

The net asset value of an international bond fund can be expected to increase if: --interest rates fall abroad. --the U.S. dollar weakens. --If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. --If the U.S. dollar weakens, the value of other currencies will rise. --This would also increase the NAV for a portfolio of international bonds.

...

--A fund designed to generate current income for its shareholders would not hold an income bond, also known as an adjustment bond. --Income bonds pay interest only if the issuer has enough earnings to do so. --They are often issued by companies coming out of bankruptcy. As a result, these bonds tend to trade like zeroes.

...

--A mutual fund with a portfolio of common stock is subject to market risk. . --If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal.

...

--All of the following are advantages of investing in mutual funds: --exchange privileges within a family of funds managed by the same management company. --the ability to invest almost any amount at any time. --the ability to qualify for reduced sales loads on the basis of accumulation of investment within the fund.

...

--An objective of high-capital appreciation is most likely realized by a stock fund. --A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.

...

A retired customer was unhappy with the low yields paid by her CDs. In their first meeting, her registered representative recommended Class B shares of a long-term government bond fund, emphasized the safety of government bonds, and provided her with a prospectus. After signing a statement saying she had read and understood the prospectus, the customer invested all of her money in the fund. A year later, interest rates rose and the value of the fund declined. Having assumed the fund was government guaranteed, she was upset and became increasingly so when she learned that the deferred sales charge could cause her to lose additional money if she were to redeem her shares. Which of the following statements is TRUE? --The representative should have fully explained the features, charges, price fluctuations, and other characteristics of a bond fund before having the customer make such a substantial investment commitment. --This customer is used to low-risk investments. The prospectus must not only be supplied, but the risks fully explained as well.

10.5.1.6

All of the following are characteristics typical of a money market fund EXCEPT: A) its net asset value normally remains unchanged. B) it has a high beta and is safest in periods of low market volatility. C) the underlying portfolio consists of short-term debt instruments. D) it is offered as a no-load investment. Click for Answer and Explanation Answer: B --A money market fund has almost no price volatility, since the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta.

...

The prospectus of the ABC Fund contains the phrase "will have at least one-quarter of common stock investments in the field of business machines." The ABC Fund is: --a specialized fund. --A fund that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector is a specialized fund. -- A balanced fund invests in a balance of bonds and common and preferred stocks. -- A diversified fund does not invest more than 5% of the fund's assets in any one issuer. -- A growth and income fund may invest in many industries, seeking both dividends and capital gains

...

Which of the following mutual fund portfolio allocations would probably be most suitable for a 40-year-old professional who states that he is an aggressive investor? A) 50% small-cap stocks, 50% U.S. government securities. B) 5% small-cap stocks, 5% international stocks, 90% large-cap stocks. **** 50% small-cap stocks, 25% international stocks and 25% large-cap stocks. ***** D) 50% corporate bonds, 50% municipal bonds. --A portfolio of small-cap stocks as well as one with international stock is generally considered to be one with the higher risk levels associated with an aggressive investor. ---Comparatively, the remaining choices would be too conservative for an aggressive investor.

...

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and since they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? --*ATF Overseas Opportunities Fund. --Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. --The tax-free fund will not provide additional diversification or the best hedge against inflation. -- A high-grade bond fund will not add diversification.