Question

9 which of the following explains why it is beneficial to purchase a constant dollar amount of a mutual fund each month?

avoids the risk of a one time buy when the fund value is low
avoids the risk of not being able to purchase the fund
allows the fund to earn a higher interest rate
avoids the risk of a one time buy when fund value is high

Explanation:

Define the investment strategy

The practice of purchasing a constant dollar amount of a financial asset (like a mutual fund) at regular intervals (such as each month) is known as Dollar-Cost Averaging.

Analyze the mechanics of the strategy

By investing a fixed dollar amount regularly, an investor automatically buys more shares when the price is low and fewer shares when the price is high. This lowers the average cost per share over time.

Evaluate the risk mitigation

A major risk of investing a large lump sum all at once (a one-time buy) is bad timing—specifically, buying right before a market drop when prices are at their peak. Regular monthly investing mitigates this risk.

Assess the given options

• Option 1: "Avoids the risk of a one time buy when the fund value is low" is incorrect because buying when the value is low is actually desirable.
• Option 2: "Avoids the risk of not being able to purchase the fund" is incorrect because availability is rarely an issue for mutual funds.
• Option 3: "Allows the fund to earn a higher interest rate" is incorrect because mutual funds earn returns through capital gains and dividends, not fixed interest rates.
• Option 4: "Avoids the risk of a one time buy when fund value is high" is correct because it prevents the investor from accidentally putting all their money in at a market peak.

Answer:

• Avoids the risk of a one time buy when the fund value is low
• Avoids the risk of not being able to purchase the fund
• Allows the fund to earn a higher interest rate
• Avoids the risk of a one time buy when fund value is high (Correct answer)