Question

1. What is a mutual fund?

2. What are three reasons someone would invest in mutual funds?

3. What are three objectives of mutual funds?

4. You need $1,000,000 to expand your business. Which method, debt or equity financing would you pursue and why?

5. Is now a good time to invest in the stock market? Why or why not?

6. You have just inherited $1,000,000. What would you do with the money and why?

7. What questions should you ask before investing in a mutual fund?

8. What questions should you answer before investing in stocks?

Answer 1

Mutual Fund

A mutual fund is a type of financial vehicle which consist of pool of money collected from many investors to invest in portfolio created of securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus, based on which investor can invest.

Benefits of Investing in Mutual Fund

1. Risk diversification

Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors. Hence, mutual fund risk is much lower than individual stocks.

2. Smaller capital outlay

Generally, Investors require a large capital outlay to build a diversified portfolio of stocks.

On the other hand, since mutual funds work based on pooling of money, mutual fund investors can have the beneficial ownership of a diversified portfolio of stocks with a much smaller capital outlay.

3. Investment expertise

Investing in stock market requires a lot of experience and expertise.

Mutual funds are managed by professional fund managers who have sufficient expertise and experience in picking the right stocks to get the best risk adjusted returns.

Objectives of Mutual Fund

1. Investment Growth

The Main objective of mutual funds is to have Investment Growth model. Investors who are retirement ready and looking for aggressive returns can do so by taking some extra risk. Mutual Fund sufficing this objective invests money in fast-growing companies like small caps or companies with positive trends in stock price (price momentum) etc.

2. Tax Savings

Tax Savings is also one of the important objectives of Mutual fund. Mostly wealthy clients, Institutional investors, and corporates have an objective to minimize the tax outlays. Taxes can turn into returns making it negative or trivial.

3. Goal Based Investing

This is the most important objective of mutual fund. The Fund of Funds could be dynamic and invests according to target asset mix suitable for investors after looking at his/her risk profile and liabilities etc.