Question

Compare investing in mutual funds to investing directly in specific companies on the stock market and bond market.

Answer 1

Mutual Funds: Mutual funds pool investments to invest in stocks, bonds and other securities.By investing in mutual funds or investing in different number of shares unsystematic risk can be minimised because correlation between stocks will be less than 1. So return to risk ratio will be higher in mutual funds.

Mutual Funds provide higher returns as compared to bond while standard deviation or risk of mutual fund is less than investing in specific companies on the market. Mutual funds are usually managed by fund managers who have good knowledge on financial management. . Hence they provide higher return with lower risk.
Investing in stock may provide higher return but the risk of lower returns is very high as they have both diversifiable and non diversifiable risk. Investing in bond has assured low return but risk is 0.