Money market mutual fund refers to a mutual fund required by law to facilitate investments in low risk securities. The fund cushions investors from losses that result from credit, market and liquidity risks. Evidently, most companies prefer using money market fund because it has a lower level of risks compared to other mutual funds. In particular, this approach is preferable in most settings since it pays dividends reflecting rates for short-term interest.
The approach is also safer than other approaches due to its high diversification level and its immediate liquidity capacity. Thirdly, it produces higher returns than banks, it has minimal investment requirements and it lacks purchase costs (Jones 4). As noted by scholars, it is safe and effective for investors to invest their money in money market mutual fund because of the following reasons. Firstly, money market mutual fund has been instrumental in providing investors with convenient parking areas especially when they are not ready to execute various transactions.
During this time, it provides ultimate safety and liquidity incentives, which implies that investors are always able to access the expected amount of money anytime they need it. The mutual fund is beneficial to investors such as brokerage firms since the fund enables them to offer convenient cash services to clients. Furthermore, it enables investors to earn extra percent points within their annual returns, which are higher compared to those from other investment companies (Garman and Forgue 2).
Description of money market mutual fund
Money market mutual fund refers to a trust responsible of attracting a huge sum of savings from investors with common financial goals. Conversely, the mutual fund collects money from various companies, then the fund manager invests them in securities depending on the objectives offered by the approach (Northcott 12). However, most of the investments that the fund deals with range from shares to money market instruments and debentures among others. Therefore, this makes mutual fund to act as a vehicle used by investors responsible for holding collective investment of funds, applying securities allowed by regulations. Mutual fund unlike banks and other financial institutions does not accept a deposit from people with such intentions as lending or investment purposes (Howat and Reid 685).
Concurrently, the mutual fund investments have different regulations. For example, it does not allow to grant a term loan by the mutual fund scheme. It has the power of borrowing so that it can attain all the liquidity needs. In addition, classification of a mutual fund can depend on its structure or investment objectives. When classifying according to its structure, it entails open-ended fund, close-ended funds and hybrid schemes. Classification of money market mutual fund can also occur depending on the investment objectives. This entails the growth funds, income funds, balanced funds, and money market funds among others (Garman and Forgue 2). Moreover, mutual fund structure consists of the sponsor, trust, trustees, custodian and asset Management Company.
The advantages of money market mutual funds
Just like other securities, money market mutual fund also has some risks such as market risks, political risks and interest rate risks among others. However, the regulations within money market mutual fund market have many advantages compared to other investment methods. Some of these advantages include the fact that it has high safety measures. This is so because the mutual fund makes preservation of capital its major objective. In addition, money market funds offer an excellent access to cash. This has encouraged the initiation of many brokerage accounts including fidelity cash holding systems, to offer the mutual fund a sweep option (Howat and Reid 685). Furthermore, most people prefer mutual fund because professional funds manager manages their money.
The approach has reduced risks, because it offers an investor the option of investing money in different stocks. Most investors find the approach to be cheaper, since it allows investors to start investing with little amount. Apart from that, the approach is convenient, since most of service providers offer online services making it easier for their clients to access them at their suitable time. There is a great variety of money market mutual funds, and this enables the investor to invest money in those sectors he/she is interested in (Miles 328). Finally, most investors prefer this approach because they can get tax benefit when they decide to invest in the tax saving mutual fund.
Differences between money market mutual funds and others investment methods
As mentioned above, the fund is different from other available money investment methods offered by different companies around the world. For example, there is Forex market investment that handles different products ranging from stocks to currency trading. On the commodity side, the investment company deals with precious metals such as gold, silver and platinum together with grains and agricultural products.
Therefore, this is an essential investment method for customers because it offers them a chance of diversifying their investments. Then, there is a buying and selling stock, which is a preferable investment option for trading. It also proved to be effective, and when a client purchases a share of the stock it is similar to buying a small segment of the company (Jones 6). It is a good investment since it has allowed many companies to be a part of the Forbes 400 best companies by allowing them to possess big shares within both private and public corporations. Conversely, there is a trade indices investment, which allows the investor to invest in funds that reflect the index movement.
Deciding to invest with trade indices gives one a chance to invest in a big market segment. Day trading is also an investment approach even though it does not involve much of investing. The reason for this is that approach allows investors to buy and sale in a short period with the aim of making immediate profit. Finally, there is a real estate investment, which entails purchasing and renting of real estates. It usually presupposes buying an old house and renovating it in order to make profits as well as purchasing a house from a distress seller and reselling it to make a profit (Northcott 49).
Famous money market mutual funds companies and why it is beneficial for companies to have much in liquid asset
There are different famous money market mutual fund companies around the world that holds a significant amount of money. Some of these companies include ABN Ambro, Birla mutual fund, Fidelity Mutual Fund, Franklin Templeton Mutual Fund, JP Morgan, Sundaram and Reliance among others. However, different researches have proved that it is beneficial for the above listed companies to have a lot of resources in terms of liquid asset. This is because having much in liquid asset ensures maintaining of solvency. Most of the listed companies use the liquid asset in meeting the fixed expenses to acquire business necessities and settle emergency expenses. This implies that holding liquid assets plays a significant role for most companies during tough economic times, when companies are in need of purchasing goods and settling bills (Miles 329).
Additionally, companies prefer liquid assets because they use them in conducting large purchases, settling income tax or carrying out transactions in the near future. Liquid asset is also beneficial for companies, especially when they are interested in borrowing funds. This is because in most cases the lending institutions require the borrowing company to have a certain amount of money so that they can verify that the company can cover the financed amount of money (Howat and Reid 686). Considerably, this is an imperative factor because a lending institution does not consider the company’s assets as a guarantee for borrowing. Therefore, companies interested in borrowing money should ensure that they attain the requirements, which involves income and liquidity.
Lehman brothers company, the purpose of the Financial Stability Oversight Board and why the board view market mutual funds as a threat to the overall financial system
The fall of Lehman Brothers occurred on 16th of September 2008, which led to Reserve Primary Fund declaring a share price towards its 97% flagship fund. However, this was a real shock, since it was the first ever opened to public money market fund to break a buck. The situation resulted into the drop of the fund’s net asset value to 97%. The breaking of a buck had a huge impact on the US money market funds, especially those invested within the non-governmental securities. The reason for this is that most investors in non-governmental securities decided to move their money to the funds that invested in governmental securities and bank deposits only (Northcott 71)…
Furthermore, the situation made institutional investors to liquidate more than retail investors. For example, research indicates that institutional investors discharged 16% of their total holdings within a few days, while individual investors liquidated 3% within the same period. Therefore, this had a great financial impact on money market mutual fund, which included freezing of the commercial paper market. The impact on mutual fund was apparent because it had 40% of the outstanding volume within US commercial paper. The situation was worse making the US government to step in and guarantee refund of mutual funds (Howat and Reid 689).
Remarkably, the creation of Financial Stability Oversight board had several purposes. Initially, the board was responsible for reviewing the exercise of the authority, which entails policies created by the secretary from the office of financial stability. Additionally, the board makes appropriate recommendations to the secretary regarding the application of authority. Thirdly, the board ensures that it reports any form of suspected fraud or misinterpretation to the special Inspector general. As well, the board is responsible for ensuring that the policies that the secretary will implement rhyme with its purpose and are in the economic interest of US and protect taxpayers. In most cases, Financial Stability Oversight Board consider mutual funds to be a threat to overall financial systems.
This is because there are some possibilities that mutual funds are likely to create or increase the rate of liquidity and credit problems, thus spreading within financial companies including markets. This is because the nature of activities and practices that are executed by the fund board has high vulnerability that may result into huge lose. This may have negative impact on companies because it spreads at a high rate among funds thus impairing liquidity and affecting the availability of short-term credit. Due to size and scale concentration, the issue will spread quickly in the financial system and economy in general (Miles 335).
How to avoid Lehman Brother’s incidences and how to make money market mutual funds be safer
In order to avoid an incident like the one that affected Lehman Brothers Company, it is essential to put different factors into consideration. Initially, investors in mutual funds have to ensure that they possess various preferences. This implies that mutual fund markets should offer high rate securities to allow investors to choose the one that they prefer. Besides, mutual fund should consider introducing floating net asset value on every share.
It can ensure this by eliminating special exemption, which allows it mortise the cost of accounting so that it can remain stable (Miles 339). Moreover, mutual fund should work hard towards lowering financial instability and the risks that it encounters in the following ways. Firstly, it can modify the expectations of investors. Mutual fund can meet this by introducing floating funds thus making gains and loses a common scenario of the company.
This will allow investors to change in line with their mutual fund shares and lower their perception that they do not bare any losses or risks while investing with mutual funds. It will also enable investors to understand that they can incur losses and encounter risks at any time (Garman and Forgue 59). Consequently, in case of situation like the one that happed to Lehman Brothers Company, it will not be a significant event.
This is because investors will understand that Money mutual fund fluctuated in value. In order to improve and control money market mutual funds in companies, it is essential to put the following into consideration. Firstly, companies that rely on mutual market funds as their key investment portfolio should ensure that they maintain a 3% Net Asset Value, in line with the risks that their fund portfolio holds.
This can only be possible when the involved companies believe that there are no risk-free assets (Northcott 79). The companies should also ensure that they have a buffer of up to 1% of their total fund’s asset, so that they can absorb any daily alterations within a value of securities. Conversely, companies should never put all their money in a single mutual fund. This is essential because in case something bad happens to the mutual fund, they may loose all their money. Therefore, companies should consider investing all their money in diversified sectors to reduce risks and encourage excellent profits (Jones 69).
Indeed, the research paper offers much information about money market fund, which entailed its meaning, benefits, classification and regulations among others. The information gives clear indication of the concepts’ imperativeness in steering investment activities in various settings. It is also bound to enable stakeholders in the financial sector to make credible investment decisions and evaluation of key investment portfolios such as securities, bonds and stocks. As noted, money market mutual fund has made many companies record exemplary performance over the years and corporations that seek to improve their performance should embrace the concept.
Garman, Thomas, and Forgue, Raymond. Personal finance. Australia: South-WesternCengage Learning, (2012). Print.
Howat, John, and Reid, Leyk. Compensation Practices for Retail Sale of Mutual Funds: the Need for Transparency and Disclosure. Fordham Journal of Corporate & Financial Law, 12.4 (2007): 685-716.
Jones, Charles. Mutual Funds: Your Money, Your Choice : Take Control Now and Build Wealth Wisely. Upper Saddle River, NJ: Financial Times/Prentice Hall, 2003. Print.
Miles, Weyn. Can Money Market Mutual Funds Private Sufficient Liquidity to Replace Deposit Insurance? Journal of Economics and Finance, 25.3 (2001): 328-342.
Northcott, Alan. The Mutual Funds Book: How to Invest in Mutual Funds & Earn High Rates of Returns Safely. Ocala, Fla: Atlantic Pub. Group, 2009. Print.