Future Business Leaders of America (FBLA) Agribusiness Practice Test

What is a key benefit of mutual funds for investors?

1. They require no management fees

2. They provide immediate liquidity

3. They offer diversification of investments

4. They allow direct ownership of real estate

The correct answer is: They offer diversification of investments

One of the most significant advantages of mutual funds is that they offer diversification of investments. This means that by purchasing shares in a mutual fund, investors can own a small portion of a wide variety of assets—such as stocks, bonds, or other securities—without needing to buy each individual asset separately. Diversification helps to spread risk because the performance of the overall portfolio is not solely dependent on any single investment. When one investment performs poorly, others may perform well, thus stabilizing returns. This feature is particularly beneficial for individual investors who may not have the capital or expertise to effectively build a diverse portfolio on their own. Mutual funds enable them to participate in a broader market without requiring extensive knowledge of which securities to buy, making it easier for them to manage risk and potentially achieve better financial returns over the long term. Other options do not provide the same level of benefit. While liquidity is an attractive quality of mutual funds, it is not immediate in every case as it depends on the mutual fund’s structure and market conditions. Although mutual funds do involve management fees, this is not a benefit to investors. Lastly, direct ownership of real estate is typically associated with real estate investment trusts (REITs) or direct property ownership, not mutual funds.