Investment Funds and Asset Management
Fund structures
Know open-end funds (issue and redeem continuously at NAV), closed-end funds (fixed share count, trade at premiums or discounts to NAV), unit investment trusts, exchange-traded funds (intraday trading, creation/redemption in kind, generally low cost) and money market funds (stable NAV, short-dated instruments). Understand mutual fund pricing at net asset value = (assets − liabilities) / shares outstanding, struck at a set valuation point.
Fees and share classes
Entry (front-end) loads, exit loads, management fees, performance fees and expense ratios. Distinguish sales charges from ongoing costs, and note that ETFs trade with commissions and spreads. Candidates should know that lower costs compound into higher net returns over time.
The asset management process
Investment policy statement, strategic asset allocation, tactical tilts, security selection, monitoring and rebalancing. Understand active versus passive management, tracking error, benchmark selection and the efficient market debate. Know the roles of portfolio manager, research analyst, trader and compliance.
Traps
Questions often confuse open-end and closed-end pricing, or assume ETFs always trade exactly at NAV (they can trade at small premiums or discounts). Another trap: a fund's NAV is not its market price for closed-end funds. Also beware of double-counting fees when computing net returns.
Worked example
A fund holds assets of 105 million, liabilities of 5 million and 4 million shares. NAV = (105 − 5) / 4 = 25 per share. If a 2% front-end load applies, an investor paying 10,000 buys 10,000 × (1 − 0.02) / 25 = 392 shares.
Rule of thumb
NAV is a valuation, not a guarantee of the price you will get on an exchange.