Final answer:
The final fund to a participant in a mutual fund is influenced by contributions plus interest and dividends earned. Diversification through mutual funds offers a balance of risks and returns, with high liquidity.
Step-by-step explanation:
The final fund available to a participant in an investment program such as a mutual fund is determined by the total contributions made by the participant, along with any interest and dividends that accrue over time. The growth of these funds is contingent on increases in both the workforce and investments, which are critical for schemes that aim to provide returns exceeding the initial contributions.
Diversification in investment is advisable to mitigate risk, and investing in a mutual fund provides this by pooling investments in a range of companies and assets. This can lead to potentially higher rates of return over time, although it also involves higher risk compared to putting money in less volatile assets. However, compared to investing directly in individual stocks, mutual funds offer lower individual risks and returns.
Liquidity is generally high in mutual funds, especially if they are readily traded, which means the investor can easily convert their investment into cash. Furthermore, the power of compound interest can substantially increase the value of regular contributions to such investment schemes, leading to significant wealth accumulation over the long term, potentially placing a dedicated saver in the top 10% of American households in terms of wealth.