Question

Assume you are working in an investment company as an investment advisor. You have a new individual investor ( called Kim) who wants to invest in financial securities.

Kim is 45 years old, married with 3 kids (all in school), works as a marketing manager in an international pharmaceutical company and lives in a big apartment with his family in New York City. Kim is a new investor who is looking for a long-term  investment horizon and aiming income gain from his investment. Kim is a risk-averse investor, who does not like to take a high risk when investing, with very limited investment

Knowledge, so he needs your advice regarding which type of mutual funds he should invest in.

A) According to Kim's demographic factors and investment aim, would you advise him to invest in a specific financial security (as individual bonds and stocks) or invest in a mutual fund? (Why explain your answer )

B) If you decide to invest in a mutual fund, what type of the following mutual funds (money market fund, fixed income fund, balanced fund, equity fund, index fund, or global fund) would you select to invest in for Kim and why? (Explain)

(Hint: select One type of mutual funds that is most suitable for Kim's demographic factors, investment aim, and investment horizon).

C) Analytically Explain in details why you have selected this specific type of mutual fund for Kim? (Consider the risk and return of the selected fund and the current economic situation).

D) Explain the financial securities that are included in the selected mutual fund?

Answer 1

A]

It is advised for Kim to invest in a mutual fund because mutual funds are professionally managed by fund managers. As Kim has limited investment knowledge, investing in specific securities is not recommended as this involves considerable research and monitoring which may be beyond the scope and abilities of Kim.

B]

A balanced fund is recommended because Kim has a long-term investment horizon, but is risk averse and seeks income gain from his investment. Thus, a balanced fund with both equities and fixed income would provide the long-term capital appreciation as well as income gains.

C]

A balanced fund has its investments split between fixed income and equities. Thus, it combines features of both fixed income funds and equity funds. It provides moderate returns (higher than fixed income funds, but lower than equity funds) with moderate risk (higher than fixed income funds, but lower than equity funds).

This type of fund is selected for Kim because it provides income gains (which is an investment goal for Kim) as well as capital appreciation over the long term (Kim has a long term investment horizon)

D]

The financial securities included are :

• Equities - These are usually blue chip or large-cap US stocks. Other categories of equities such as emerging market equity, Non-US equity, or mid-cap equity may be too risky for a risk-averse investor such as Kim
• Fixed income - These are usually long-term Treasury bonds and AAA rated corporate bonds. Other categories of bonds such as lower rated corporate bonds, municipal bonds or non-US bonds may be too risky for a risk-averse investor such as Kim