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!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

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Which mutual fund category is specifically designed to minimize risk to investors?

Equity mutual funds
High-yield bond funds
Money market mutual funds
Index funds

The correct answer is: Money market mutual funds

Money market mutual funds are specifically designed to minimize risk for investors. These funds invest in short-term, high-quality, low-risk instruments such as Treasury bills, certificates of deposit, and commercial paper. The primary goal of money market funds is to maintain a stable value, typically pegged at $1 per share, making them less volatile compared to other types of mutual funds. Investors turn to money market funds for safety, especially when they seek to preserve their capital while earning a modest return. The underlying investments have lower interest rate risk and credit risk, which contributes to their overall stability. This makes money market mutual funds particularly suitable for conservative investors or those looking to temporarily park cash with minimal risk. In contrast, equity mutual funds, high-yield bond funds, and index funds involve greater exposure to market fluctuations, price volatility, and the potential for loss. Therefore, they cannot provide the same level of risk minimization that money market funds offer.