Question

What contract feature of a mutual fund investment makes it far less likely that funds suffer "runs" like bank deposits did before the creation of the FDIC? a. The stock market is inherently more stable than bank deposits. b. Mutual fund companies must inject additional funds to keep investors' balances above par. c. Mutual fund investments are values on a proportional basis (net asset value per share), while bank deposits are a sequential claim contract. d. Risk tolerances are higher for investors now so they are more willing to let mutual fund investments "ride" without taking their funds out.

Answer 1

Mutual funds invest in markets so their value is derived from the underlying, while the bank deposit is not targeted we don't know where our money will be used, we are able to cash out at a predefined rate at the end of period while in a mutual fund the value depends upon underlying values.

In the bank deposits, it can run out if there are more NPAs and the bank is not able to survive, In bank deposit, it will be like you either get full or not a single penny while in mutual fund net asset value will be decreased if there is the bad performance by the underlying and it that value is frequently updated but they will be able to repay whatever the asset value maybe.

Ans C. Mutual fund investments are values on a proportional basis (net asset value per share), while bank deposits are a sequential claim contract.