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:

i) You dont have to give any fees or share your profit with the mutual funds.

Cons:

i) You will be exposed to more risk as while investing in individual stocks or bonds you will be exposed to all the risks associated with those stocks and bonds.

ii) Risk management will not be properly done .

iii) You have to dedicate a lot of time to undertand the company you want to invest in.

2) Alpha Risk: It is the risk of you active return being zero or even negative.An investor would expect an excess return against the benchmark if he is taking more risk in terms of volatility.

Beta Risk: It represents the systematic risk that is the volatility associated with the portfolio as compared to a benchmark.

Beta risk can be used through diversification.

3)The most important factor was that the common household started investing in the financial assets such as stocks and bonds through professionally managed funds for better return.Before this most of the investments were made in lands or golds.

Secondly the returns from more traditional investments like land and golds started declining.

Thirdly more and more companies started raising money through IPOs.

4) Charesteristics of an average investor in mutual funds in 2009:

i) Limited knowledge about financial markets.

ii) Didn't knew the diversifiaction benefits.

iii) After the crash of 2008, they were scared to invest directly into stocks and bonds.