Question

1. Why do you think mutual funds are such popular investment vehicles? Write 100 words.

2. Why doesn’t management simply diversify its operations? Write 50 words.

3. Isn’t that what management is supposed to do? Write 50 words.

Please write in your own words and write appropriate answers. Thank you!

Answer 1

Answer 1:

Mutual funds are very popular among the investors. They are getting popular as they offer diversification to the investors. The investors can invest in various securities pooled at one place. It offers a larger portfolio to make investment. Through mutual funds, an investor can get optimal diversification to get maximum return with minimum risk. The high volatile stocks can be balanced out by adding less volatile stocks in the portfolio of mutual funds.

Further, the mutual funds are professionally managed by experts. As such, the investors get expert advise without much to worry. The funds are invested after proper analysis and due care is been taken care of. The mutual funds offer more liquidity as well. As such, small investors find it attractive to invest money.

The mutual funds can be customized also as per the choice and preference of the market or industry. They can be high-risk, low-risk, more return, less volatile, industry specific, instrument specific etc.

Answer 2:

Diversification is a very important tool and way of increasing returns and minimising the risk. But there are certain risks attached to it which make it a tough call for managers to diversify their operations. This may include money constraint. If the managers have limited funds, diversification is not possible. One possible reason can be lack of expert knowledge. Or may be the managers want to maintain their expertise in one operation or develop a core competency. There could be certain legal considerations as well that doesn't let managers to simply follow diversification.

Answer 3:

Management is not only supposed to follow diversification. The management has to take decisions to increase the shareholders' wealth by taking appropriate risks and getting returns. They have to make strategic decisions so as to ensure to run a healthy business. The management is responsible for deciding where to strategically invest so as to maintain a optimal portfolio to earn high return on low risk.

Diversification is only a part of the management's aforesaid responsibility. The management is in real responsible for managing the entire business or portfolio as a whole.