A mutual fund
Group of answer choices
a. is a financial market where small firms mutually agree to sell stocks and bonds to raise funds.
b. is funds set aside by local governments to lend to small firms who want to invest in projects that are mutually beneficial to the firm and community.
c. sells stocks and bonds on behalf of small and less known firms who would otherwise have to pay high interest to obtain credit.
d. is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of both stocks and bonds.
The correct answer and explanation is:
The correct answer is d. A mutual fund is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of both stocks and bonds.
Explanation:
A mutual fund pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, and other securities. The key characteristic of a mutual fund is that it allows individuals to invest in a wide range of assets, without having to manage individual investments themselves. The fund’s portfolio is managed by professional portfolio managers who decide on the best mix of investments based on the fund’s goals, such as growth, income, or preservation of capital.
When you invest in a mutual fund, you purchase shares in the fund. The value of each share is based on the total value of the fund’s assets, which is calculated at the end of each trading day. This method of pooling resources allows smaller investors to access a diversified portfolio, which would be difficult or expensive to replicate on their own.
The diversification offered by mutual funds is one of their main advantages. By holding a variety of different securities, a mutual fund can reduce the risk associated with investing in individual stocks or bonds. This makes mutual funds appealing to both beginner and experienced investors.
There are different types of mutual funds, including equity funds (which invest primarily in stocks), bond funds (which invest primarily in bonds), and balanced funds (which invest in a mix of both). Mutual funds can be actively managed, where fund managers make decisions on buying and selling assets, or passively managed, where the fund tracks a specific index.
In summary, mutual funds are a popular investment vehicle that allows individuals to gain exposure to a diversified portfolio with relatively low cost and management requirements.