Advanced Diploma of Financial Planning (ADFP) Practice Test

Which type of mutual fund primarily invests in fixed-income securities with maturities ranging from several months to over 30 years?

1. Equity mutual funds

2. Money market mutual funds

3. Fixed-income or bond mutual funds

4. Hybrid mutual funds

The correct answer is: Fixed-income or bond mutual funds

The correct choice focuses on mutual funds that specialize in investing in fixed-income securities, which include a variety of bonds and other debt instruments. These funds are specifically designed to provide investors with income through interest payments, as they primarily invest in assets like government bonds, corporate bonds, and municipal bonds. The mention of maturities ranging from several months to over 30 years indicates a diverse duration profile, which is characteristic of fixed-income or bond mutual funds. This type of investment is particularly relevant for those who seek lower volatility compared to equities, as well as a steady income stream. Furthermore, fixed-income funds can be an essential part of a balanced investment strategy, as they may offer capital preservation and income generation, especially in fluctuating market conditions. In contrast, other types of mutual funds like equity funds focus on stocks and the potential for capital appreciation rather than income, money market funds typically invest in very short-term, low-risk instruments, and hybrid funds combine both stocks and bonds, but do not primarily focus on fixed-income securities. Thus, recognizing the specific focus of the mutual fund on fixed-income securities justifies why this choice is the appropriate answer.