Advanced Diploma of Financial Planning (ADFP) Practice Test

What advantages do money market mutual funds typically offer?

1. High returns with significant risks

2. Liquidity and minimal credit risk

3. Requires a large minimum investment

4. Invest in only high-risk securities

The correct answer is: Liquidity and minimal credit risk

Money market mutual funds are known for their safety and accessibility, making them an attractive option for investors seeking a low-risk environment for their funds. The primary advantages they offer include liquidity and minimal credit risk. Liquidity means that investors can easily buy and sell shares in these funds, often without facing entry or exit fees, allowing for quick access to their capital when needed. This characteristic is essential for investors who may require immediate access to their money without facing penalties or long waiting periods. Minimal credit risk is another significant advantage. Money market mutual funds typically invest in short-term, high-quality debt instruments, such as Treasury bills, commercial paper, and certificates of deposit. These instruments have a very low risk of default, making the funds a safer investment choice compared to other types of mutual funds that may invest in equities or lower-rated bonds, which can present higher risks. The other options do not accurately reflect the nature and characteristics of money market mutual funds. They do not typically offer high returns with significant risks, nor do they require large minimum investments. Additionally, these funds do not invest in high-risk securities; instead, they focus on stable, low-risk assets to ensure the preservation of capital while providing modest returns.