Flammox Growth Fund, a mutual fund, issues 200 shares in the market. However, because of a sharp demand from the investors, the fund issues 350 additional shares. In this scenario, the Flammox Growth Fund is structured as a(n) q, : a. open-end fund. b. hedge fund. c. umbrella fund. d. offshore fund.
The correct answer and explanation is:
Correct Answer: a. open-end fund.
Explanation:
The Flammox Growth Fund is described as issuing an initial 200 shares, followed by an issuance of 350 additional shares due to increased investor demand. This behavior is characteristic of an open-end fund.
What is an Open-End Fund?
An open-end fund is a type of mutual fund that does not have a fixed number of shares. Instead, it issues new shares to investors when there is demand and redeems shares from investors who wish to sell. This allows the fund to grow or shrink in size based on investor activity.
When investors buy into an open-end fund, the fund issues new shares to accommodate them. When investors redeem their shares, the fund buys them back. The price per share is determined by the Net Asset Value (NAV), which is calculated at the end of each trading day based on the value of the fund’s underlying assets.
Why It’s Not the Other Options:
- b. Hedge fund: These are private investment funds with limited investor access, high minimum investment requirements, and complex strategies. Hedge funds do not continuously issue shares in response to public demand like open-end funds.
- c. Umbrella fund: This is a structure that houses multiple sub-funds under a single legal entity. It doesn’t inherently relate to issuing additional shares due to demand.
- d. Offshore fund: This refers to a fund domiciled outside the investor’s home country for regulatory or tax reasons. It does not describe the fund’s share issuance structure.
Conclusion:
Because Flammox Growth Fund is expanding the number of shares it offers in response to investor demand, it clearly operates like an open-end fund, which allows for flexible issuance and redemption of shares.