Free CSI IFC Practice Exam with Questions & Answers | Set: 6

An income trust is an investment trust that holds income-producing assets, such as debt instruments, royalty interests, or real properties. It can be structured as either a personal investment fund or a commercial trust with publicly traded closed-end fund shares. The main attraction of income trusts, in addition to certain tax preferences for some investors, is their stated goal of paying out consistent cash flows for investors, which is especially attractive when cash yields on bonds are low12

References = Canadian Investment Funds Course (CIFC) - Module 2: Investment Products - Section 2.3: Income Trusts3 and web search results from search_web(query="income trust")12

3: https://www.ifse.ca/wp-content/uploads/2021/08/CIFC-Module-2.pdf

Explicit costs of operating a mutual fund include:

Management fees,

Operating expenses,

Custodial fees,

Record-keeping,

Marketing/distribution.

These costs are embedded in the MER (Management Expense Ratio) and are borne by the investors, as they reduce fund returns.

The manager (B) oversees operations but does not personally cover costs.

The sponsor (C) establishes the fund, and the distributor (D) sells units, but neither pays the ongoing operating costs.

A mutual fund dealing representative must complete a training program within 90 days of starting to act in that role and be closely supervised for six months. The feedback from the document states:

"All mutual fund dealing representatives are required to complete a training program within 90 days from the day that they first start acting as a dealing representative and must be closely supervised for six months."

Disclosure documents are documents that provide information about a mutual fund’s features, risks, performance, fees, and expenses to investors and regulators. Disclosure documents are required by securities laws and must be prepared and filed by the fund manager in accordance with the prescribed rules and standards. Disclosure documents relating to mutual funds include the following:

Statement of net assets: This is a document that shows the value of the fund’s assets and liabilities as of a specific date. It also shows the net asset value per unit (NAVPU) of the fund, which is the price at which investors can buy or sell units of the fund. The statement of net assets is part of the fund’s financial statements, which are prepared and filed semi-annually and annually.

Annual information form (AIF): This is a document that provides additional information about the fund that is not included in the simplified prospectus or the fund facts. The AIF includes information such as the fund’s history, organization, management, governance, policies, risks, conflicts of interest, fees, expenses, taxation, and legal matters. The AIF is prepared and filed annually.

Management reports of fund performance (MRFP): These are documents that provide information about the fund’s financial performance, portfolio composition, risk profile, and management expenses. The MRFPs are prepared by the fund manager and filed semi-annually and annually. The MRFPs include sections such as financial highlights, past performance, summary of investment portfolio, management discussion of fund performance, and financial statements.

Canadian Investment Funds Course, Chapter 6: Fund Operations and Regulations1

The financial planning pyramid illustrates the risk-return spectrum of investments. For a very aggressive investor, high-risk securities like OTC securities are suitable. The feedback from the document states:

"As a visual aid, the planning pyramid helps you show clients how mutual funds fit into the investment universe. A very aggressive investor could consider investments such as OTC Securities."

Loss aversion bias causes investors to hold onto unprofitable investments due to a stronger desire to avoid losses than to seek gains. The feedback from the document states:

"Loss aversion bias states that people generally feel a stronger impulse to avoid losses than to acquire gains. Loss aversion can prevent people from unloading unprofitable investments, even when they see little to no prospect of a turnaround."

The securities administrator’s power of disclosure ensures that investors receive complete, accurate, and timely information to make informed decisions. The feedback from the document states:

"The securities administrators ensure that all documents and other required information are prepared in accordance with requirements and provided to appropriate parties in a timely manner. The securities administrators also review all prospectuses for full, true and plain disclosure. Complete, accurate and timely disclosure allows clients to make fully informed investment decisions."

Research and the CSC curriculum stress that asset allocation is the single most important factor in determining portfolio performance, more than market timing or security selection.

Proper asset mix (equities, fixed income, cash) accounts for most portfolio success or failure.

C is correct because the management expense ratio (MER) reflects the percentage of each dollar of fund assets that is used to pay for management services and operating expenses of a mutual fund. The MER includes various fees and expenses, such as management fees, administration fees, trailer fees, audit fees, legal fees, and taxes. The MER reduces the return of the fund, as it is deducted from the fund’s income and capital gains before they are distributed to investors. Mutual funds are not required to calculate the MER on a daily basis (A), but rather on an annual basis. Trailer and brokerage fees are included in the MER (B), not charged separately. Mutual fund performance is impacted by the MER (D), as it lowers the net return of the fund. Rates of return are published net of fees, but they do not reflect the impact of the MER on the fund’s performance.