5.2 Mutual Funds (Open-End)
Mutual funds (open-end management companies) provide continuous liquidity by issuing and redeeming shares directly with investors at forward-priced net asset values.
Key FINRA Exam Takeaways
- Continuous primary offering of common shares; cannot issue preferred stock or bonds.
- Shares are REDEEMABLE: bought from and sold back to the fund sponsor, not traded in secondary markets.
- Must deliver a summary prospectus or statutory prospectus at or before purchase.
- Purchases occur at Public Offering Price (POP = NAV + Sales Charge); sales occur at NAV.
- Orders execute using FORWARD PRICING: next calculated NAV (normally 4:00 PM ET).
Continuous Offering and Capital Structure
Mutual funds have an unlimited number of shares. Because shares are continuously issued and redeemed, they do not trade on stock exchanges. By law under the 1940 Act, mutual funds may ONLY issue common shares; they cannot issue preferred shares or debt.
Forward Pricing Mechanism
An order entered at 11:00 AM on Tuesday will not execute at yesterday's price. It executes at Tuesday's 4:00 PM ET NAV. Orders placed after 4:00 PM ET execute at Wednesday's 4:00 PM ET NAV.
A client calls their registered representative at 2:30 PM ET on a trading day and submits an order to redeem 500 shares of an open-end mutual fund. At what price will the shares be redeemed?