SIE Exam: Investment Funds
Section 2 — Understanding Products and Their Risks (44% of exam)
Investment funds are pooled investment vehicles that the SIE exam covers extensively. Open-end mutual funds are the primary focus — you must understand forward pricing (NAV calculated at end of day), share classes (Class A with front-end loads, Class B with CDSCs, Class C with level loads), and breakpoint discounts including letters of intent and rights of accumulation. The 12b-1 fee structure (up to 0.75% distribution plus 0.25% service) and what qualifies a fund to call itself no-load are frequently tested. Closed-end funds differ fundamentally from open-end funds: they issue a fixed number of shares that trade on exchanges and can trade at premiums or discounts to NAV. Exchange-traded funds (ETFs) combine features of both, offering intraday trading with the diversification of funds. The creation and redemption mechanism through authorized participants keeps ETF prices close to NAV. Unit investment trusts (UITs) hold fixed, unmanaged portfolios with stated termination dates. The Investment Company Act of 1940 governs registration requirements, including the 75-5-10 diversification test for diversified management companies. Target-date funds and fund-of-funds round out this topic.
Key Concepts
Net Asset Value (NAV)
Calculated as (Total Assets - Total Liabilities) / Shares Outstanding. Open-end mutual funds use forward pricing, executing all orders at the next calculated NAV.
Front-End Sales Load (Class A)
A sales charge deducted from the investment amount before shares are purchased. Breakpoint discounts reduce the load at higher investment amounts.
Contingent Deferred Sales Charge (CDSC)
A back-end fee charged when Class B shares are redeemed within a specified period. The charge typically declines over time and disappears after several years.
12b-1 Fee
An annual fee for marketing and distribution expenses. Capped at 0.75% for distribution plus 0.25% for service. Funds with 12b-1 fees above 0.25% cannot be called no-load.
Exchange-Traded Fund (ETF)
Trades on exchanges throughout the day at market prices, offering intraday liquidity. Authorized participants create and redeem shares in large blocks to keep prices near NAV.
Breakpoint Discount
A reduced sales charge on Class A shares at higher investment amounts. Letters of intent and rights of accumulation help investors qualify for breakpoints.
75-5-10 Diversification Test
Under the Investment Company Act of 1940, for at least 75% of assets, a diversified fund cannot invest more than 5% in any single issuer or own more than 10% of any issuer's voting securities.
Practice Questions
Question 1 of 4
An investor places an order to purchase shares of an open-end mutual fund at 2:00 PM Eastern Time. At what price will the order be executed?
Question 2 of 4
An investor who signs a letter of intent (LOI) with a mutual fund is committing to:
Question 3 of 4
Which of the following is an advantage that ETFs generally have over open-end mutual funds?
Question 4 of 4
Under the Investment Company Act of 1940, a diversified management company must meet which of the following requirements for at least 75% of its total assets?
12+ more practice questions
Get full access to AI-graded practice, timed mock exams, and progress tracking.
Start Practicing FreeFrequently Asked Questions
What is the difference between open-end and closed-end funds on the SIE?
Open-end funds continuously issue and redeem shares at NAV. Closed-end funds issue a fixed number of shares through an IPO that then trade on exchanges, potentially at premiums or discounts to NAV. ETFs combine features of both.
How do mutual fund share classes work?
Class A shares charge a front-end sales load with breakpoint discounts for larger investments. Class B shares have no upfront charge but impose a CDSC on early redemptions. Class C shares have level loads with higher ongoing expenses. Class A is generally best for large, long-term investments.