ACCA Advanced Financial Management (AFM) Practice Exam

In which activity do mutual funds engage?

1. Only selling bonds to investors

2. Investing in a portfolio of securities

3. Providing direct loans to businesses

4. Only trading futures and options

The correct answer is: Investing in a portfolio of securities

Mutual funds primarily engage in investing in a diversified portfolio of securities, which typically includes stocks, bonds, and other financial instruments. This approach allows investors to pool their money together to gain exposure to a wide range of investment options that they might not be able to afford individually. By investing in a variety of securities, mutual funds help to spread out risk and can enhance the potential for returns over time. The structure of mutual funds is designed to provide individual investors with professional management and broad diversification, which can be more effective than individual stock picking. This practice aligns with the goal of mutual funds to achieve capital appreciation, generate income, or both for their investors. In contrast, the other activities mentioned, such as only selling bonds to investors, providing direct loans to businesses, or exclusively trading futures and options, do not accurately represent the primary function of mutual funds. Each of these activities involves different financial instruments or methods that are not utilized in the core operations of mutual funds.