Advanced Diploma of Financial Planning (ADFP) Practice Test

Which type of fund is generally associated with longer-term investment horizons?

1. Money market mutual funds

2. Equity funds

3. Fixed-income funds

4. Hybrid funds

The correct answer is: Equity funds

Equity funds are typically associated with longer-term investment horizons because they invest primarily in stocks, which have the potential for significant capital appreciation over time. Investing in equity funds allows investors to participate in the growth of companies, and historically, stock markets have shown an upward trend over longer periods despite short-term volatility. This longer investment horizon is supported by the compounding effect of reinvestment of dividends and capital gains, which can substantially increase the value of investments over time. In contrast, money market mutual funds generally focus on preserving capital and providing liquidity, making them more suitable for short-term investments. Fixed-income funds primarily invest in bonds that yield returns but may not offer the same growth potential as equities, and hybrids often balance between equities and bonds but still may not prioritize long-term growth in the same manner as pure equity funds. Thus, equity funds clearly align with a strategy aimed at achieving significant returns over extended periods.