Question

Case Study K: Eileen Ponders Mutual Funds

Eileen Moriarty is the director of a major charitable organization in Burlington, Vermont. A single mother of one young child, she earns what could best be described as a modest income. Because charitable organizations aren’t known for their generous retirement programs, Eileen has decided it would be best for her to do a little investing on her own. She’d like to set up a program to supplement her employer’s retirement program and, at the same time, provide some funds for her child’s college education (which is still 12 years away). Although her income is modest, Eileen believes that with careful planning, she could probably invest about $250 a quarter, and she hopes to increase this amount over time. Eileen now has about $15,000 in a bank savings account, which she’s willing to use to kick off this program. In view of her investment objectives, she isn’t interested in taking a lot of risk. Because her knowledge of investments extends no further than savings accounts, she approaches you for some investment advice.

Critical Thinking Questions

Explain to Eileen the key reasons for purchasing mutual fund or ETF shares.

What types of mutual funds or ETFs would you recommend to Eileen?

Explain to Eileen the selection process for making mutual fund and EFT investments.

Do you think some type of real estate investment would make sense for Eileen? If so, what type would you suggest? Explain.

Answer 1

1. I would recommend her to purchase Mutual Funds which are passive in nature or exchange traded fund which are mostly passive.The key reasons for purchasing mutual fund or ETF shares would be-

A. They are well diversified and they are less risky as the unsystematic risk is completely eliminated in the portfolio.

B. Exchange traded fund offers liquidity and they can be redeemed as and when she wants because they are liquid in nature as they are traded.

C. Mutual Funds provide better rate of return than banks and since it is is recommended to invest in index. It has always beaten the Bank rate of return.

D.Mutual Funds offers a very good platform to invest for the longer period of time as there are a wide variety of funds present, offering different values.

E. Mutual Funds can also be a vehicle to produce uniform earnings like they pay capital gains and dividend distribution.

F.Mutual Funds are managed by highly skilled professional so it is very safe to invest in such funds.