A client wants exposure to gold, downside protection on her tech stocks, and a tax-deferred income stream for retirement. Three different vehicles, three different regulatory regimes, and three different traps for an adviser who treats them all as "investments."
An open-end fund continuously issues new shares and redeems existing ones at the next computed net asset value. The acronym NAV stands for net asset value: the per-share value Congress chose as the pricing anchor because daily independent valuation prevents the manager from cherry-picking favorable intraday prices when issuing or redeeming.
NAV equals total fund assets minus total fund liabilities, divided by shares outstanding. The fund computes NAV once per day, typically at 4:00 p.m. Eastern when U.S. equity markets close. Orders received before the cutoff get that day's NAV; orders after get the next day's. This is forward pricing, mandated by the Investment Company Act of 1940.
KEY: A mutual fund investor never knows the exact execution price at order entry. The price is determined later, at the next NAV calculation.
Common mistakes
- Treating ETFs as identical to mutual funds. ETFs trade intraday at market prices that may diverge from NAV; mutual funds price once daily at NAV. ETFs can be sold short and bought on margin; open-end mutual funds cannot.
- Confusing futures and options on the obligation question. A futures contract obligates both parties to transact. An option gives the buyer a right but not an obligation. Candidates pick "obligation" for both, missing the fundamental asymmetry of options.
- Forgetting that variable annuity withdrawals are ordinary income. The tax-deferred wrapper feels like a Roth IRA, but withdrawals are taxed at ordinary rates, not the 15%/20% long-term capital gains rates. For a high-bracket client, this can erase the deferral advantage versus a taxable equity account.
Bottom line
- Open-end funds price once daily at NAV via forward pricing; ETFs trade intraday at market prices that may differ from NAV; UITs are fixed unmanaged baskets with a termination date
- Class A charges a front-end load with breakpoints (starting at $25,000); Class B charges a back-end CDSC that declines over time; Class C charges a level 12b-1 fee with no breakpoints. Class C wins short-term, Class A wins long-term
- 12b-1 fees pay distribution costs out of fund assets; the FINRA cap is 1% combined, and a fund charging more than 0.25% cannot call itself no-load
- Long options have limited loss (premium paid) and time decay; short uncovered calls have unlimited loss; futures are obligations, not rights, and are marked to market daily
Exam shortcut
"Unlimited loss" almost always points to the short naked call. When the question asks which strategy carries unlimited risk, scan for "short call" without "covered." That is the answer 90% of the time. Match share class to holding period: A for long-term, C for short-term, B if it appears at all. The exam tests breakpoint-aware suitability.
The full lesson (about 3,740 words, 25 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B2
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