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Questions and Answers
What do investors buy when they invest in a mutual fund?
What do investors buy when they invest in a mutual fund?
- Direct ownership of specific stocks or bonds
- Debts issued by the mutual fund
- Units or portions of the mutual fund (correct)
- Shares of the fund manager's company
What is the role of a mutual fund manager?
What is the role of a mutual fund manager?
- Responsible for investing the gathered money into specific securities (correct)
- Responsible for marketing the mutual fund to potential investors
- Responsible for regulating the stock market
- Responsible for auditing the financial statements of the mutual fund
What is the biggest advantage of mutual funds?
What is the biggest advantage of mutual funds?
- Diversification, by minimizing risk & maximizing returns (correct)
- Tax-free investment growth
- High-frequency trading capabilities
- Guaranteed fixed returns
Why are mutual funds considered cost efficient?
Why are mutual funds considered cost efficient?
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What led to the emergence of mutual funds in the USA?
What led to the emergence of mutual funds in the USA?
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Study Notes
Mutual Fund Investment
- Investors buy shares of a mutual fund, which represents a fraction of the overall portfolio managed by the fund.
- Each investor's money is pooled together to create a diversified portfolio of stocks, bonds, or other securities.
Role of a Mutual Fund Manager
- A mutual fund manager is responsible for making investment decisions to achieve the fund's objectives.
- They conduct research, analyze market trends, and select securities for the portfolio based on their investment strategies.
Advantages of Mutual Funds
- The biggest advantage is diversification, reducing risk by spreading investments across various assets.
- This helps investors avoid significant losses from any single investment performing poorly.
Cost Efficiency of Mutual Funds
- Mutual funds are considered cost efficient due to lower transaction costs per investor, as expenses are spread over all fund shareholders.
- Management fees are typically lower than individual stock picking fees, making it accessible to a broader range of investors.
Emergence of Mutual Funds in the USA
- The modern mutual fund industry emerged in the USA during the 1920s, driven by a need for diversification among investors after market volatility.
- The establishment of the Investment Company Act of 1940 provided regulatory oversight, adding credibility and stability to the industry.
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