A pooled investment gathers money from many investors into a single portfolio managed by a professional. You get diversification you could not afford alone. The tradeoff is fees and, for some vehicles, limited liquidity.
HIGH-FREQUENCY: The Series 65 tests three distinctions constantly: open-end vs. closed-end structure, active vs. passive management, and how each vehicle is priced.
An open-end fund issues and redeems shares directly with investors at net asset value. There is no secondary market.
NAV per share = (Total Assets - Total Liabilities) / Shares Outstanding
You place an order during the day. You do not get that moment's price. The fund calculates NAV after the market closes at 4:00 PM ET, and your order executes at that closing NAV. This is forward pricing. An order placed after Tuesday's close fills at Wednesday's closing NAV.
Open-end funds can charge a sales load (commission) or be no-load. A front-end load reduces the amount actually invested. You hand over $25,000, a 5% load takes $1,250, and $23,750 goes into shares.
Common mistakes
- Confusing open-end and closed-end fund pricing. Open-end funds always transact at NAV (calculated once daily at the close). Closed-end funds trade at market price on an exchange, which can be above or below NAV. If a question describes a fund "trading at a 5% discount to NAV," it is a closed-end fund.
- Calculating the front-end load on NAV instead of POP. The sales load percentage applies to the public offering price, not NAV. If NAV is $20 and the load is 5%, POP = $20 / (1 - 0.05) = $21.05. Trap: $20 x 1.05 = $21.00.
- Mixing up call and put rights. Call buyer = right to buy. Put buyer = right to sell. The mnemonic "call up, put down" helps: call profits when price goes up, put profits when price goes down. Trap: selecting "right to sell" when asked about a call option.
Bottom line
- Open-end funds price at NAV once daily (forward pricing); closed-end funds trade at market price (premium or discount to NAV); ETFs trade intraday
- 12b-1 fees are ongoing distribution costs capped at 1%. Class A front-end load, Class B back-end CDSC, Class C level load
- REITs must distribute at least 90% of taxable income; distributions taxed as ordinary income, not qualified
- Call buyer = right to buy, put buyer = right to sell. Buyer's maximum loss is the premium paid
Exam shortcut
When a question describes a fund "trading at a premium or discount," it is a closed-end fund, open-end funds and UITs always transact at NAV. When a question mentions "intraday trading," the answer is ETF or closed-end fund, never a mutual fund. Options quick check: Call Up, Put Down. Buyers pay premiums and have capped losses. Writers collect premiums and face the obligations.
The full lesson (about 3,930 words, 26 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B5
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- B9
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- B11
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- B14
- B15
- B16
- B17
- B18
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