Question

Once the traditional IRA or Roth IRA is established, you decide to invest the proceeds in a mutual fund. Identify the type of mutual fund you would select. Examples include stocks, bonds, or a balanced mutual fund. Using the Internet, research and select a specific mutual fund that meets your desired risk tolerance. You can use examples of mutual fund companies such as Oppenheimer and Franklin Templeton. Be sure to justify your selection.

Answer 1

The type of mutual fund to select depends on the person's goals and attitude towards risks. Generally, mutual funds are a pool of paper assets of different people that is managed by fund managers as they buy stocks from investments in the market.

There can be three types of source of mutual fund: stocks, bonds and balanced fund. Stocks are shares of big companies, say for example, Proctor & Gamble. They sell their shares to the market that is open to all potential investors. When a fund manager buys shares, he becomes a co-owner of the company. Thus, if the profit of the company increases, you are also given with additional dividends. However, the risk is high because if the company goes bankrupt, you lose your money. Bonds are owned by government agencies that are open to the public to borrow their money to be used on projects for the country. This is low risk because the government promises to return the amount of money borrowed plus a fixed interest. Balanced fund is the median of both because fund managers source their mutual funds both on stocks and bonds.

So, if you are aggressive, then stocks are fit for you. If you are conservative, better stick with bonds because there is a guarantee. If you are a mix of both, balanced fund is your option.