IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system
A mutual fund in India pools small amounts from thousands of investors and buys a wide range of company shares. Which benefit of financial intermediation is MOST directly provided by the fund to each small investor?
The fund gives each small investor diversification at low cost, because pooled money buys many shares that individuals could not afford separately. Risk is reduced but not eliminated, and returns, price stability and management control are not guaranteed by pooling.
- AElimination of all investment risk
- BDiversification at low costCorrect
- CA guaranteed return above the inflation rate
- DExemption from market price fluctuations
- Control over the management of the companies held
Explanation
Pooling lets each investor hold a small slice of many securities, spreading risk at low transaction cost. It does not remove risk, guarantee returns, stop price movements or give control over the companies.
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