Question

1) What are the pros and cons of investing directly in individual stocks or bonds versus investing indirectly through a mutual fund?

2) What is the difference between alpha and beta risk? Which one can be reduced through diversification?

3) What factors drove the growth of the fund industry from the mid-1980s until the financial crisis of 2008?

4) What were the characteristics of the average investor in mutual funds around 2009?

5) What is the difference between the SEC and FINRA as regulators? Why do we give regulatory power to FINRA and not the ICI?

6) Why do you think the mutual fund industry has experienced a decline in front-end sales loads since the introduction of 12b-1 fees? Do you believe that most sales of equity and bond funds will be in the direct marketing channel without loads or 12b-l fees, or in the intermediary channel with loads and/or 12b-l fees?

Answer 1

1. Pros of investing directly in individual stocks :

(i) If the investor is knowledgeable and is well informed of the stock market , he can invest directly into the stock market into the stocks of his choice and take gains of the fluctuations in the market price .

(ii) Buying and selling is easier in direct investment since the investor has first hand control over the stocks and can exit or buy at any time during trading hours.

(iii) For direct investment ,one can base his selection on the basis of economic ,industry and company analysis and has a freedom of choice.

Cons of investing directly in individual stocks :

(i) Investing directly in a stock market requires adequate research, wide knowledge and a educated guesswork which a individual if not thoroughly qualified may be able to do so.

(ii) The risk involved in direct investment is way higher than mutual funds and may not be suitable for a investor who has little risk appetite.

(iii) Also brokerage eats into the investment if you invest into small quantities of stock.

Pros of Investing through Mutual Funds:

(i) The stocks are handled by an expert in the stock investment field , who choose the right stocks and diversify risks and ensure maximum results.

(ii) Also investing through mutual funds gives a host of tax benefits.

(iii) Investors can buy small quantities of stock with lesser brokerage and fees.

Cons of investing through mutual funds:

(i) No guarantee of return since the selection of stocks depends on the judgment of the fund manager and not all mutual funds can be winners.

(ii) It is difficult for an investor to choose the right fund since past performance of the fund is the only criteria to be reckoned at. This cannot herald good of the future.

(iii) Hidden costs in mutual funds are generally not disclosed by mutual funds companies which may reduce the return on investment in the fund.