A client, age 35, has a moderate risk tolerance and is saving for a down payment on a home within the next 3-5 years. They want an investment that offers a reasonable return without significant principal risk. Which of the following investment products would be most suitable?
- ABalanced Mutual Fund
- BAggressive Growth Mutual Fund
- CMoney Market Fund
- DVariable Annuity
Show answer & explanationAnswer & explanation
Correct answer: A. Balanced Mutual Fund
A balanced mutual fund typically invests in a mix of equities and fixed income, providing moderate growth potential with less volatility than pure equity funds, making it suitable for a medium-term goal with moderate risk tolerance. Money market funds are too conservative for a 'reasonable return,' while aggressive growth funds and variable annuities carry too much risk or are for longer-term goals.
Why the other options are wrong
- B. Too high risk for a 3-5 year goal with moderate risk tolerance.
- C. Money market funds offer safety but typically very low returns, likely insufficient for a 'reasonable return' over 3-5 years.
- D. Variable annuities are generally for long-term retirement planning and carry market risk, not suitable for a short-to-medium term down payment.
Short-to-Medium Term Savings Suitability
For short-to-medium term goals (e.g., 3-7 years) with moderate risk tolerance, investments that balance growth potential with principal preservation are suitable, such as balanced mutual funds or conservative allocation funds.
- Time horizon: 3-7 years
- Risk tolerance: moderate
- Objective: reasonable return, principal preservation
- Suitable investments: balanced funds, short-term bond funds, conservative allocation funds
Memory trick: Mid-term goals need a balanced approach, not too fast, not too slow.