A mutual fund, an exchange-traded fund and a unit investment trust can hold the same 500 stocks yet differ in how a customer buys, pays and gets out. Most fund questions test those differences, and most fund math comes down to one habit: divide the sales charge by the offering price.
An investment company pools many investors' money into one portfolio of securities. Investors cannot watch the managers, so the Investment Company Act of 1940 regulates how these pools are built and run. Investment company structure starts with Section 4, which sorts these companies into three classes:
- Face-amount certificate company: It promises a stated sum at maturity in return for installment payments.
- Unit investment trust (UIT): It is organized under a trust indenture, has no board of directors and issues only redeemable units, each an undivided interest in a fixed set of...
- Management company: This is every other investment company. An investment adviser buys and sells its portfolio under a board's oversight.
Common mistakes
- Dividing by NAV: The sales charge percentage uses POP as its base, so $0.90 on a $15.00 POP is 6.00%, not 6.38%.
- Disclosure as a cure: Say a representative steers a customer to $24,500 instead of $25,000, so she pays 5.50% instead of 4.75%. That violates Rule 2342 even if she was told.
- Mislabeling no-load: A fund with 0.35% in combined 12b-1 and service fees fails the 0.25% test and cannot be called no-load.
Bottom line
- Structure: Section 4 defines face-amount certificate companies, UITs (no board, fixed basket, redeemable units) and management companies; Section 5(a) splits management companies into open-end (redeemable) and closed-end.
- Pricing: Orders get the next computed NAV; POP equals NAV plus the sales charge; sales charge percentage equals (POP − NAV) ÷ POP.
- Exchange trading: Closed-end funds and ETFs trade at premiums or discounts to NAV; only authorized participants create and redeem ETF creation units, usually in kind.
- Sales charge caps: 8.5% of POP, 8.0% without rights of accumulation, 7.75% or 7.25% without quantity discounts, 7.25% with a service fee.
Exam shortcut
Find the pricing clue first. "Next computed" means compare the order time with the cutoff. "Premium" or "discount" means a closed-end fund or ETF, and "redeem with the issuer at NAV" means an open-end fund or UIT. When a stem gives NAV and POP, divide the difference by POP and expect a distractor built on NAV. For share classes, ask how much first: breakpoints point to Class A.
The full lesson (about 4,873 words, 32 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C15
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