Todd O Hanlon has worked in the management services division of Focus Consultant
ID: 450750 • Letter: T
Question
Todd O Hanlon has worked in the management services division of Focus Consultants for the past five years. He currently earns an annual salary of about $120,000. At 33, he's still a bachelor and has accumulated about $100,000 in savings over the past few years. He keeps his savings in a money market account, where it earns about 3 percent interest. Todd wants to get "a bigger bang for his buck," so he has considered withdrawing $50,000 from his money market account and investing it in the stock market. He feels that such an investment can easily earn more than 3 percent. Heidi Jackson, a close friend, suggests that he invest in mutual fund shares. Todd has approached you, his broker, for advice. Explain to Todd the key reasons for purchasing mutual fund or ETF shares. What special fund features might help Todd achieve his investment objectives? What types of mutual funds or ETFs would you recommend to Todd? What recommendations would you make regarding Todd's dilemma about whether to go into stocks, mutual funds, or ETFs? Explain. Explain to Todd the rationale for choosing ETFs over mutual funds.Explanation / Answer
1. Mutual fund is financial services organization that receives money from its shareholders and invests those funds on their behalf in diversified portfolio of securities. Exchange traded fund (ETF) is investment company whose shares trade on stock exchanges. However, the key reasons for purchasing mutual funds shares are: diversification, professional management, financial returns, and convenience. Diversification is achieved because mutual funds share investment in diversified portfolio of securities. A professional management is used to select the securities held in the funds, so it supposed to expect that financial returns will be safer than if someone actually managed their own portfolio. As I believe that Todd sould to understand that fund might be outperform where he would be able do which it doesn’t mean fund will be outperform the market. Mutual funds are convenience just to buy and whatever they offer a variety of attraction services.
2. The feature available from mutual funds includes which: automatic investment and reinvestment plan, systematic withdrawl plans, conversion privilages, and retirement progrmans. So todd have three different interest: (1) the automatic reinvestment plans, which would be enable for him to plow back his dividends and capital gains distributions and earn fully compounded rate of returns; (2) conversion privilege, todd would to enable to move his money from one of fund to another as his objection or investement changes; and (3) retirement programs is available any funds, which he can enable to enjoy tax-sheltered benefits that accompany IRAs and other progrms for himself.
3. Todd’s choice among of income fund would be depend by how much he want to take a risk disposition and risk return tradeoffs that he perceives in each of these types of funds. If todd want more investment in growth and income fund, he have to choose any kind of growth fund if he willing to take a risks, he might consider going offshore with his money by investing in international fund. So choice he have among those alternative will largely of todd’s investment goal, risks desposition and risk return tradeoffs. I believe that Todd needs to know what he need to consider about taxes while developing his investment plans. Because he is make good money to earn over years and also he is single too. But i think that he doesnt need investment income and concentrate of either growth fund or tax income.
4. His choices between investing in common stock, mutual funds, or ETFs only he can resolves on his own risk return. An investment in common stock fund would allow him to achieve same type of returns as what they have available on common stock investment. The difference between those two is that mutual fund investment will provides diversification and professional management, so he has no choices to individual securities or gains. So he need to balance out of his own investment to decided which one he would to prefer to use. If he chose to directly invest in common stocks, he probably have to devote more on his own tiem to managing his money more better in case if his professional management with mutual fund.
5. ETFs are same as mutual fund but they offer a degree of flexibility from his standard funds. ETFs is kind offer more professional management of traditional mutual fund and the liquidly of exchange trade stock.