Question

A wealthy billionaire recently retired since his travel business was adversely affected by the COVID-19 pandemic. He wants to start a mutual fund focusing on equities. He has hired two fund managers. One of them is his son who is a graduate of the University of Adelaide and believes in market efficiency. You are the second fund manager. You are skeptical about market efficiency having read a number of academic and practitioner articles on the topic. Since your boss is not a finance person, you need to convince him regarding the investment strategies that you will use in conjunction with your colleague

In the interest of equity, your boss is thinking of allocating equal amount of the funds undermanagement to you and your colleague. Is this the correct approach? Argue your case – equal or not using concepts learned in the course. What methodology should you use to come-up with the best allocation scheme?

Answer 1

A mutual fund is a type of investment product where the funds of many investors are pooled into an investment product. The fund then focuses on the use of those assets on investing in a group of assets to reach the fund's investment goals.

Before investing in any fund, you must first identify your goals for the investment. Is your objective long-term capital gains, or is current income more important?

You should also consider personal risk tolerance. Can you accept dramatic swings in portfolio value? Or, is a more conservative investment more suitable?

Since the investor is a retired person. So, it's assume that he will not take much risk.Growth and capital appreciation funds generally do not pay any dividends. If you need current income from your portfolio, then an income fund may be a better choice. These funds usually buy bonds and other debt instruments that pay interest regularly. Government bonds and corporate debt are two of the more common holdings in an income fund.

These funds often have significantly less volatility, depending on the type of bonds in the portfolio. Bond funds often have a low or negative correlation with the stock market. You can, therefore, use them to diversify the holdings in your stock portfolio.

However, you may want to include bond funds for at least a portion of your portfolio for diversification purposes, even with these risks.