Chapter 16, Problem 16.1PQ1

Summary Introduction

To determine:

Two major reasons for which investor purchase mutual fund.

Introduction: Mutual fund is a security which is issued by pooling money from investors with the sole motive of investing in different kind of securities. Mutual funds give chance to small investor to invest in security with professional expertise.

Answer to Problem 16.1PQ1

Solution:

Professional management and diversification are the two major reasons for which the investors purchase mutual funds.

Explanation of Solution

Two major reasons for which investor purchase mutual fund are,

• Professional management: When someone buys a mutual fund, professional expertise comes along with it. It means that whenever someone invests in mutual fund it directly does not get invested in securities. Instead, it goes to fund manager who then invests it after analyzing different alternatives with customer requirements in mind.
• Diversification: Diversification means buying different kinds of security for a portfolio to reduce risk. Mutual fund has better capacity to diversify an individual portfolio as compare to an individual itself. If a person wants to diversify his portfolio himself he has to invest in at least one security of different kinds but with mutual fund a person can buy in percentage of one security which will provide diversification even in smaller amount of investments which normally does not available to investors.

Hence, professional management and diversification are the two major reasons.