Advanced Diploma of Financial Planning (ADFP) Practice Test

What is a characteristic of equity mutual funds?

1. They invest primarily in cash equivalents.

2. They invest primarily in fixed-income securities.

3. They invest primarily in ownership interest securities.

4. They invest primarily in real estate securities.

The correct answer is: They invest primarily in ownership interest securities.

Equity mutual funds are designed to invest primarily in ownership interest securities, which include stocks and shares of companies. The primary characteristic of these funds is their focus on capital appreciation through equity investments, allowing investors to gain exposure to the performance of the underlying companies. By holding a diversified portfolio of stocks, equity mutual funds provide investors with a mechanism to participate in the equity markets, benefiting from the potential for higher returns over time compared to other types of investment vehicles. This focus on ownership interests allows investors to take advantage of the company's growth and profitability. In contrast, funds that focus on cash equivalents or fixed-income securities do not align with the typical investment strategy of equity mutual funds. Similarly, while some investment vehicles may target real estate securities, this is not the primary characteristic of equity mutual funds.