Small investor, finance discussion week 2 help

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Justify why a small investor would benefit from investing in a mutual fund, as compared to the many other investments that exist. Provide support for your justification.

Take a position on the benefits and risks of a mutual fund versus a hedge fund, indicating if a financial manager is most likely to invest in a mutual fund or a hedge fund. Support your answer.

Jan 18th, 2016

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Benefits of investing in a mutual fund:

Diversification- involves the mixing of investments within a portfolio and is used to manage risk. For the individual investor, this could be very costly.

Economies of scale- this can be easily understood through the use of discounts; in many stores, the more of one product you buy, the cheaper that product becomes. Mutual funds are able to take advantage of their buying and selling size and thereby reduce the transaction costs for the investors.

Divisibility- mutual funds provide mutual fund investors the ability to make periodic investments through monthly purchase plans while taking advantage of averaging of the dollar cost. This adds another advantage- liquidity.

Professional management- mutual funds come with a professional manager who will guide the investors on how to buy and sell stocks that he has researched on.

Mutual funds or hedge funds?

The primary similarity between hedge funds and mutual funds is that both are managed portfolios; a manager or group of managers selects investments and adds them to a single portfolio. 

With both hedge funds and mutual funds, portions of the fund are sold to investors who are then in position to take advantage of any gains while also dealing with losses associated with the holdings.

However, hedge funds are managed in a more aggressive manner than mutual funds. From the ability to short sell stocks to taking positions in options, hedge fund managers are aggressive as they attempt to generate the best gains possible for clients.

On the other side, mutual funds are safe since they are not allowed take on such risk, making this the safer of the two options.

A financial manager would go with mutual funds since the risk involved is not too great inasmuch as the returns are low.

Please let me know if you need any clarification. I'm always happy to answer your questions.
Jan 18th, 2016

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