Explanation:
Index funds are a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds adhere to specific standards (or rules) that stay in place no matter the state of the markets. Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts. Legendary investor Warren Buffett has recommended index funds as a haven for savings for the sunset years of life. Rather than picking out individual stocks for investment, the fund manager of an index fund replicates the performance of a specific index. Therefore, the role of the fund manager is limited and the fund's performance is not heavily dependent on their expertise. This makes index funds a suitable investment option for Daisy Singh, who is concerned about the potential impact of management changes on her investment returns.
Choice B is incorrect. Avoiding mutual funds entirely is not a recommended strategy. Mutual funds, managed by professional fund managers, offer diversification and can be a good investment avenue for novice investors like Daisy who may not have the expertise to manage their own portfolio.
Choice C is incorrect. While investing in bonds and stocks individually could potentially yield higher returns, it requires a deep understanding of the market and individual securities. As Daisy is a novice investor, she might lack the necessary knowledge to make informed decisions about which stocks or bonds to invest in.
Choice D is incorrect. The statement that Daisy must not invest in stocks herself does not
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Q.2562 Daisy Singh recently attended an investor awareness programme which sensitized the general public to consider equity investment as an avenue for generating wealth. While she was excited to invest in stocks, Singh was a bit apprehensive about her expertise in stocks selection. While discussing the issue with her friend, she was informed about the mutual fund industry and how professionals in the mutual fund industry skillfully select stocks and bonds thus making an investment in mutual funds much easier for beginner investors like her.
As Singh starts looking for a mutual fund in which to invest her money, she notices that most of the funds had highlighted and advertised specific fund managers as the sole reason behind the fund’s impressive performance. Though Singh was confident enough and was willing to invest money in mutual funds, she wondered what effect the change in fund manager would have on the returns generated by the mutual fund.
Daisy Singh is wary of management changes and is not willing to take any chances with individual managers. As a financial-savvy risk manager, what alternative would you suggest?
A
She should invest in an index fund.
B
She should invest in other assets but avoid mutual funds.
C
She should invest in bonds and stocks, and select them herself.
D
She must not invest in stocks herself.