Personal Finance 1st Edition by Jack R. Kapoor

Exercise 3

Deciding Whether Mutual Funds Are Right for You. Assume you are 35, are divorced, and have just received a $120,000 legal settlement. Prepare a one-page report on the major reasons you want to invest in mutual funds. (Obj. 1)

Step 1 of 2

Following are the main reasons for choosing a mutual fund investment:

• The first and foremost primary reason for choosing a mutual fund investment is that, the funds are managed by a well-managed fund manager.

• Diversification is another important reason for choosing a mutual fund.

• Mutual funds are handled by a professional fund manager with a team of researchers, who analyze about each and every company and industry before making an investment decision which is far better than an individual investment decision making.

• The portfolio is formed by the fund manager after a detailed and extensive research and they frame the portfolio with “right” securities.

• Diversification reduces the risk attached with the investment. Generally, if an investor invest his/her entire amount of investment in one particular stock and if the stock is not performing well the entire amount of investment will go for a toss and vice versa.

But by diversifying the amount of investment into various stock or bonds it will reduce the risk because the return from the investment is not entirely dependent on one particular stock. That is if one investment is resulting in a loss it will be offset by the profit from the other investment. This is the main advantage of diversification because always expectations will not come true.