Advanced Diploma of Financial Planning (ADFP) Practice Test

What is one of the benefits of mutual funds?

1. They eliminate all investment risks

2. They offer easy access to a diversified portfolio

3. They guarantee high returns

4. They require no minimum investment

The correct answer is: They offer easy access to a diversified portfolio

The benefit of mutual funds that stands out is their ability to offer easy access to a diversified portfolio. When investors buy shares in a mutual fund, they are essentially pooling their money with other investors to purchase a wide range of securities, such as stocks, bonds, or other assets. This diversification automatically spreads out the risk among multiple investments, which can reduce the impact of any single security's poor performance on the overall portfolio. This feature is particularly valuable for individual investors who may not have enough capital or expertise to build a diverse portfolio on their own. Through mutual funds, they gain access to professional management and a broader array of investment opportunities, which helps them mitigate risk while still participating in the potential for returns from different sectors of the market. The other choices do not accurately represent the nature of mutual funds. They don't eliminate all investment risks, as all investments carry some level of risk. They also do not guarantee high returns since the performance of mutual funds can fluctuate based on market conditions. Furthermore, while some mutual funds may have low minimum investment requirements, many still do require some minimum amount to invest, making it misleading to say that they require no minimum investment.