Advanced Diploma of Financial Planning (ADFP) Practice Test

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Prepare for the Advanced Diploma of Financial Planning Test. Study with interactive quizzes and comprehensive questions, each offering detailed explanations and insights. Gear up for success!

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What type of mutual funds usually invest in short-term securities?

Equity funds
Bond funds
Money market funds
Index funds

The correct answer is: Money market funds

Money market funds are designed to invest primarily in short-term securities, such as treasury bills, commercial paper, and certificates of deposit. These funds aim to provide investors with high liquidity and stability, making them a popular choice for those who want to preserve capital while still earning a modest return. The focus on short-term instruments allows money market funds to minimize credit risk and interest rate risk, offering a safe haven for investors who may need quick access to their funds without significant fluctuations in value. In contrast, equity funds typically invest in stocks and are subject to greater volatility and potential for higher long-term returns, while bond funds focus on longer-term debt instruments and may have exposure to interest rate risks. Index funds track a specific market index and generally invest in a diversified portfolio of stocks. Therefore, the defining characteristic of money market funds is their commitment to short-term securities, making them the best choice in this context.