Advanced Diploma of Financial Planning (ADFP) Practice Test

What is a primary characteristic of mutual funds?

1. They provide easy access to capital markets

2. They offer fixed returns regardless of market conditions

3. They can only be purchased through brokers

4. They require a large minimum investment

The correct answer is: They provide easy access to capital markets

The primary characteristic of mutual funds is that they provide easy access to capital markets, allowing investors to participate in a diversified portfolio of stocks, bonds, or other securities with relative convenience. This accessibility is beneficial for individual investors who might not have the resources or knowledge to directly invest in various securities on their own. Mutual funds pool money from many investors, enabling them to invest in a range of assets and thus spread the risk, while also giving investors professional management of their investments. In contrast, fixed returns are often associated with specific types of investments like bonds and do not accurately reflect the nature of mutual funds, which fluctuate in value based on market performance. Although mutual funds can be purchased through brokers, they are not limited exclusively to this mode; many are available directly from the mutual fund companies. Additionally, mutual funds often have relatively low minimum investment requirements, making them accessible to a broader audience rather than just those who can invest large amounts of capital.