Canadian Securities Course (CSC) Level 2 Practice Exam

Which withdrawal method from a mutual fund allows for a fixed percentage withdrawal annually, ensuring a steady income for the investor?

1. Ratio withdrawal

2. Fixed dollar withdrawal

3. Systematic withdrawal

4. Fixed period withdrawal

The correct answer is: Systematic withdrawal

The systematic withdrawal method is designed to provide investors with a predetermined, regular income stream by allowing them to withdraw a fixed percentage of their investment annually. This approach ensures that investors can maintain a consistent level of income, which can be particularly beneficial for retirees or those seeking to manage their cash flow. With systematic withdrawals, the investor can adjust the percentage as needed, adapting to changing financial needs or market conditions. This method also helps in the management of investment longevity by preventing significant depletion of the capital base, compared to a fixed dollar amount withdrawal which might consume the principal too quickly, especially in a down market. Overall, this method aligns with the need for certainty and predictability in income generation, making it a popular choice among investors looking for a steady income while remaining invested in the mutual fund.