Investing 101: Funds

What is a mutual fund?

• A type of investment that pools money from multiple investors to purchase a diversified portfolio of assets.

• A type of investment that tracks the performance of a specific market index.

• A type of investment that trades on an exchange like a stock.

What is an index fund?

• A type of investment that pools money from multiple investors to purchase a diversified portfolio of assets.

• A type of investment that tracks the performance of a specific market index.

• A type of investment that trades on an exchange like a stock.

What is an ETF?

• A type of investment that pools money from multiple investors to purchase a diversified portfolio of assets.

• A type of investment that tracks the performance of a specific market index.

• A type of investment that trades on an exchange like a stock.

Which investment vehicle is best suited for investors who want to achieve broad market exposure with low fees?

• Mutual funds

•  Index funds

• ETFs

Which investment vehicle typically has the lowest expense ratio?

• Mutual Funds

• Index Funds

• ETFs

How are active investing and passive investing different? 

• Active investing requires a hands-off approach while passive investing requires a hands-on approach

• Active investing typically has lower fees while passive investing typically has higher fees

• Active investing requires you to make a minimum number of trades per day while passive investing does not

• Active investing is typically done by a fund manager trying to beat the market while passive investing typically involves investing in a popular index like the S&P 500

A commonly used strategy to minimize investing risk is...

• Investing only when a stock's value is rising

• Investing in only one company

• Hiring an investment manager who promises to provide the largest returns

• Diversifying across asset classes and within each asset class

Which of the following explains why risk is not always bad when it comes to investing?

• Insurance will cover your investing losses

• As risk increases, so does the possibility of greater returns

• Robo-advisors eliminate all risk

• Gains realized from higher-risk investments are untaxed

Which of the following is a characteristic of dollar-cost averaging? 

• Dollar-cost averaging involves consistently investing small amounts of money over long periods of time

• Dollar-cost averaging is riskier than lump sum investing

• Dollar-cost averaging is advantageous because earnings are untaxed

• Dollar-cost averaging is offered only through robo-advisors

What is one difference between actively managed mutual funds and index funds?  

• Actively managed mutual funds typically have higher fees than index funds do

• Actively managed mutual funds invest in less risky investments than index funds

• Actively managed mutual funds track the performance of a single stock and bond while an index fund follows an index

• Actively managed mutual funds guarantee the average return of the securities in the fund while index funds aim to beat the market