Question

Which of the following are reasons why investors choose mutual funds?

a. Multiple select question.
b. professional management
c. guaranteed returns
d. diversification
e. depository insurance

Answer 1

Investors choose mutual funds for professional management and diversification. Mutual funds are managed by experienced professionals and offer a diverse portfolio to reduce investment risk, but they do not typically provide guaranteed returns or depository insurance.

Step-by-step explanation:

Investors choose mutual funds for several reasons:

• Professional management: Mutual funds are managed by experienced fund managers who make investment decisions on behalf of the shareholders.
• Diversification: By investing in a mutual fund, shareholders gain access to a diversified portfolio, which can reduce risk. Diversification follows the proverb "Don't put all your eggs in one basket," meaning it spreads out the risk across different assets.
• Guaranteed returns and depository insurance are not typically features of mutual funds, and thus not reasons why investors choose them.

Therefore, the correct reasons from the provided options are (b) professional management and (d) diversification.

Answer 2

Investors choose mutual funds primarily for their professional management and diversification benefits. While mutual funds do not guarantee returns or come with depository insurance, their liquidity and the expertise provided by professional managers make them a favored investment choice.

Step-by-step explanation:

Reasons Why Investors Choose Mutual Funds

Investors choose mutual funds for various reasons, including professional management and diversification. Professional management ensures that investments are managed by experts, which is particularly helpful for those who do not have the time or knowledge to manage their own portfolios. With diversification, investors benefit as mutual funds invest in a broad range of assets, reducing the risk of loss if one investment performs poorly, which is in line with the wisdom of not putting all one's eggs in one basket. It should be noted that mutual funds do not offer guaranteed returns and are not covered by depository insurance, but they remain a popular choice due to their other advantages.

Mutual funds are in high demand because they are liquid; investors can easily convert their fund shares into cash by selling them on the market. The liquidity and ease of conversion add to their appeal. According to the Investment Company Factbook, the percentage of U.S. households investing in mutual funds has steadily increased over the years, highlighting the attractiveness of mutual funds as an investment vehicle.