Which of the following types of mutual funds would most appropriately be classified as long-term investments that are properly diversified?

• A. A balanced mutual fund investing in a mix of stocks and bonds across various industries
• B. A mutual fund that invests exclusively in a single company's stock
• C. A sector-specific mutual fund focused solely on technology stocks
• D. A money market mutual fund investing in short-term debt instruments

Answer: (A)

Verified step by step guidance

1. Understand the concept of mutual funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of assets such as stocks, bonds, or other securities. They are managed by professional fund managers.
2. Identify the characteristics of long-term investments: Long-term investments typically aim for growth over an extended period and often involve a diversified portfolio to reduce risk.
3. Evaluate the options provided: Analyze each type of mutual fund mentioned in the problem to determine its suitability as a long-term, diversified investment.
4. Option analysis: A mutual fund investing exclusively in a single company's stock lacks diversification and is highly risky. A sector-specific mutual fund focused solely on technology stocks is also not properly diversified, as it is concentrated in one industry. A money market mutual fund investing in short-term debt instruments is not a long-term investment, as it focuses on liquidity and safety rather than growth.
5. Conclude that a balanced mutual fund investing in a mix of stocks and bonds across various industries is the most appropriate choice for a long-term, diversified investment. This type of fund spreads risk across different asset classes and industries, aligning with the principles of diversification and long-term growth.