Question

one of the financial institutions that was discussed were the mutual funds.outline why you would choose to invest in a mutual fund and which asset class you would select. As a fund manager and investor, provide possible ways that you can make abnormal profits.

Answer 1

I would choose to invest in mutual funds because of the following reasons:

• Offers diversification: A mutual fund invests across multiple securities and thus achieve diversification
• Lower cost: Offers many benefits and convenience in lieu of small fund management fees
• Convenient: Offers convenience such as:
  • Invest online at a click of mouse
  • Active fund management: The portfolio managers actively churns the portfolio to give you the best returns
  • Professional services: We get access to good quality research
  • Accounting: All the funds accounting are done by the fund managers. You don't have to worry about any special accounting and tracking at your end.
• Superior returns
• Simple enough for any common man to invest

I will choose any of the following asset class:

• Equity funds investing in the listed securities
• Debt funds
• Or hybrid funds having a portion of fund invested in equity and balance in debt

Possible ways to make abnormal profits:

• Select high growth securities in the portfolio
• Actively manage the portfolio: rotate the investment across scrips with time to gain superior returns
• Keep fund expenses lower
• Investment backed by fundamental research of the economy and scrips
• Invest a part of the fund in unlisted securities that can give very high returns