Money market resources (financial intermediaries) are considered one of the safest mutual funds, although it all depends on the investment period. Those who invested money in them are insured against losing the bulk of their deposits, but, on the other hand, the income of depositors is so small that inflation eats them up over time. So they will be necessary for those who want to contribute cash to short-term programs. It is about these financial intermediaries that will be discussed.
Identification of Mutual Funds
Mutual funds are cash injections that are formed through the pooling of funds from a large number of investors. Often, initial installments in some of them vary in the amount of $ 300-500, and after opening an account, subsequent investments can be in the form of any amount.
Regardless of the investment strategy and goals, the founders of a fund or group of funds are brokerage houses, investment companies. For the convenience of the founders, their money is easily transferred from the securities of one company to the securities of another without any fees.
Mutual funds specialize in investments in hard metals, money market instruments, and real estate. They are a package of bonds, stocks, cash, which are managed by an investment company on behalf of and on the command of many investors. Mixed assets belonging to a mutual fund are called its portfolio. Each share of the portfolio is a proportional property of the investor in the assets of the fund, as well as part of the income that is generated from these assets.
Principle of operation
All mutual funds operate on almost the same principle. They are formed by an investment company that sells their shares to investors, and then invests the funds received in securities portfolios. By combining the funds of depositors in a portfolio, the head of the company can diversify investments by purchasing bonds and shares in the fund.
Types of selectable instruments set the goal of investment. For example, if the goal of a stock investment company is to proclaim capital gains, then the lion's share of the funds goes to growth stocks. If the purpose of the bond fund is to pay coupon income that is not taxed, then the funds are invested in municipal bonds. At the same time, an investment company for bonds is formed by issuing them in order to diversify the portfolio and reduce the risk of default on individual bonds.
Investors are paid dividends, which are formed from the income from the securities that make up the bulk of the portfolio. A client who invested $ 1000 will receive the same profit as a percentage of the one who invested $ 100,000. The difference will be that the income of the second investor will be 100 times greater than the first (according to the proportionality of their shares in the fund).
When changes in the value of securities in a portfolio occur, the value of the net assets of the financial intermediary changes accordingly. Price fluctuations are affected by the risks inherent in many types of securities: political, economic, market.
Kinds
Mutual funds have several types, i.e. depositors invest in bonds, stocks, hybrid, commodity investment companies and in mutual funds of the money market.
Considering all types in detail, we can say that these are mutual investments that sell their own shares and invest the received funds in money market securities. It is these companies from all the others that maintain the value of their securities at a constant level. Often the price and estimated value of a share is $ 1. Keeping the price at the same level allows the fact that short-term losses from the sale of securities, any expenses of an investment company are taken away from income received from investments. This result is easiest to achieve for those funds that invest borrowed funds in short-term money market instruments, as such instruments have low price volatility.
Money market mutual funds are investments in securities with a maturity of less than one year. Such companies are the least risky among other types. Very often they are used in their portfolios as a refuge when leaving the stock market, despite this, they sometimes give high returns.
Benefits of Investing in Money Market Mutual Funds
- Diversification - the redistribution of risks between several financial instruments.
- Professional money management - escorting managers of investment company investors throughout the entire investment process.
- Wide choose. The possibility of a wide choice of investment is provided by a considerable number of mutual funds (stocks, bonds, money market).
- Liquidity - the investor can sell his shares at any time and return the funds.
- Savings - the investor buys ready-made portfolios of financial intermediaries, and does not compose it himself from the securities of individual corporations.
- Protection of the investor and his rights - mutual funds are regulated at the federal legislative level through the Securities and Exchange Commission.
- Convenience - shares can be sold or bought with the help of brokers, financial advisors, banks, insurance agents.
Mutual Fund Investment Risks
One of the main ones is the risk of losing invested capital due to a decrease in the value of net assets (NAV). In addition, there are other risks:
- percentage;
- market;
- related to the quality of securities.
With increasing market interest rates, pressure on the bond and stock markets decreases, which leads to a decrease in the NAV of bond and stock funds. Lower market interest rates have the opposite effect.
The quality of securities is determined by stock price volatility. Depositors are often concerned about the insolvency risk of mutual investment companies. The value of their assets may decline, but the likelihood of this is small. The way companies are established minimizes the risks of bankruptcy and fraud.
Mutual funds in Russia
To date, the potential of Russian mutual funds has not yet been fully disclosed for several reasons:
- They have limited inflow of long-term private investments.
- Investments in mutual funds of pension savings in the Russian Federation are prohibited by law.
These reasons limit the flow of funds to mutual investment companies, their increase is due to the translation of the value of the portfolios and revaluation of transactions with assets. Mutual funds in Russia are small and do not allow the scale of the business to be realized. The average size of Russian investment corporations is an order of magnitude lower than foreign ones.
As an example of the Russian mutual fund acts OPIF "Sberbank - money market fund." Its purpose is to obtain cash by investing in short-term bonds of Russian issuers with high credit qualities, due to the increase in the exchange value and the receipt of large income, as well as interest on short-term deposits in large commercial Russian banks.