Question

"Mutual Funds" Please respond to the following:

• Justify why a small investor would prefer a stock exchange market such as the New York Stock Exchange (NYSE), as compared to the National Association of Securities Dealers Automated Quotations (NASDAQ). Provide support for your justification.
• Take a position on the benefits and risks of a balanced fund versus a fixed index fund, indicating if a financial manager is most likely to invest in a balanced fund or a fixed index fund. Support your answer.

Answer 1

For a small investor, it is important that the capital he or she is putting in is invested in shares of stable companies with established business models. In this scenario, NYSE scores which have got many blue chip stocks listed on the exchange. While NASDAQ is mostly comprised of high technology stocks with a steep growth path ahead. However, for a small investor, it may be difficult for him to assess the growth estimates and hence it makes sense to invest in stable businesses through NYSE.

A balanced fund provides an advantage of asset balancing on a periodic basis and hence the fund remains diversified across asset classes. Investing in an indexed fund would mean that with the growth of certain stocks and decline in value of other, the index proportion would change and the portfolio would become highly concentrated. The disadvantage of balanced fund is that it would incur costs for active management and due to diversification, it may lose out on betting big on winning stocks.