Which of the following is unlikely to be a problem for mutual fund managers? (Ch
ID: 2800990 • Letter: W
Question
Which of the following is unlikely to be a problem for mutual fund managers? (Choose the false answer.)
A) Being forced to sell portfolio assets at low prices if too many shareholders redeem shares at the same time.
B) Income restrictions as a result of the limited number of mutual fund shares they have to sell.
C) Investment planning difficulties resulting from irregular cash flows in and out of the mutual fund.
D) The inability to invest in small firms because of the large monetary sums they deal with.
A) Being forced to sell portfolio assets at low prices if too many shareholders redeem shares at the same time.
B) Income restrictions as a result of the limited number of mutual fund shares they have to sell.
C) Investment planning difficulties resulting from irregular cash flows in and out of the mutual fund.
D) The inability to invest in small firms because of the large monetary sums they deal with.
Explanation / Answer
Answer : B
problems for mutual fund managers are:
Forced Redemption:
fund manager is forced to sell stocks when investors sell shares of mutual fund and the fund doesn’t have enough cash reserve to meet the demand. Since rushes of redemption usually happen when the market decline sharply — i.e., a correction or a bear market — this is usually the worst time to sell stocks. However, the fund manager has no choice and has to sell underlying stocks even if it’s not the best financial decision to do so.
irregular cash flows in and out of the mutual fund:
Mutual funds manager cannot hoard cash. When investors buy shares of a mutual fund, the fund manager must turn around and buy shares of stocks that fit within certain guideline specified by the prospectus. For example, if it’s a “Small Value Fund”, the manager cannot buy a “Large Growth” stock even if it represents a better buying opportunity. Additionally, if there are not enough good buying opportunities to choose from, the fund manager is forced to buy stocks that are less desirable.
avidence of small companies :
Many small companies are doing very well and earning adequate profits but mutual funds can not reap their benefits because they are not allowed to invest in smaller companies. Not only this, a mutual fund is allowed to hold only a fixed maximum percentage of shares in a particular industry. Due to such policy of Mutual Funds Industry the investors are deprived from the profits which can be earned by investing the funds in these small scale companies.
Hence Income restrictions as a result of the limited number of mutual fund shares they have to sell is not a problem for fund manager.
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