Answered: When choosing a mutual fund, one of the…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 5FPE

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Mutual fund objectives

When choosing a mutual fund, one of the most important things to consider is your investment objective. Mutual funds are classified into the following three categories: income, growth, and growth and income. The following exercises feature examples of three investors, each with one of the stated goals. Complete the paragraphs to illustrate your understanding of each mutual fund category.

Income Objective

Steve is nearing retirement and is looking to purchase a mutual fund that will provide a relatively safe investment as well as regular income payments. Among mutual funds with an income objective, Steve can either buy shares in_________ , which invest in CDs, government securities, and short-term obligations issued by corporations, or he can invest in ________ for a slightly higher current income return and the potential for capital appreciation as well.

Within the category of bond funds are even more specific options. Steve decides to buy shares in a fund that invests in Treasury issues maturing in five to ten years, known as ________ ___________bonds. He is also collecting income from shares he already owns in a ________ fund, a type of fund that invests in high-yield, high-risk corporate bonds.

Growth Objective

Alexa is a 32-year-old woman with two children who owns her own home and has a substantial retirement account. She recently received an inheritance from her uncle and is looking to invest in a mutual fund that targets stocks that are undiscovered and thus priced below their true value. She decides to purchase ________ shares.

Growth and Income Objective

Jamal is a 25-year-old engineer who plans to invest $500 from each monthly paycheck in a mutual fund. He is interested in a fund that includes both stocks and bond holdings (roughly 30–40% in bonds) to generate both current income and capital gains, so he buys $2,000 worth of _______shares. He would also like to put some money into a fund that invests solely in foreign securities; therefore, he purchase _______shares as well.

One feature common to all of the above mutual funds is the beneficiary designation. Based on the characteristics of the investors above, this feature would be of most interest to _________.

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