SUBJECT: Financial Market
Table of Contents
1.0 Summary- 3
1.1 Index funds- 3
2.0 Overview of money market funds and index funds- 3
2.1 Money market 3
2.2 Index funds- 4
2.3 Cost of a share of a fund- 4
2.4 Money market history- 4
3.0 Index market history- 4
3.01Historical return of the fund- 4
3.02 Index- 4
4.0 Money market 5
4.1 Investment goal of the fund- 5
5.0 Advantages of index funds- 6
5.2 Low Fees- 6
6.0 Disadvantages of index funds– 6
6.1 Lack of Flexibility- 6
6.2 Less Gains- 6
7.0 Specific risks related to money market fund- 6
7.1 Liquidity risks- 6
7.2 Reinvestment risk- 6
7.3 Instrument risk- 7
7.4 Counterparty risks- 7
8.0 Risks related to index funds- 7
8.1 Stock market risk- 7
9.0 Management of money market funds- 7
9.1 Fees and expenses of the funds- 7
9.2Rationale of investing in index funds and money market funds- 7
1.0 Summary
A mutual fund is a plan for investors that pull funds from investors to purchase assets, which are commonly known as securities, and the retailers may form an organization or trade individually.
The study involves index funds plus money market funds, which are regarded as mutual funds. The study will show a history of the funds, trends, and current economic challenges it also discusses the advantages and disadvantages, the risks of each type of funds and how they are managed.
1.1 Index funds
Index fund refers to an exchange fund that is set to follow specific set rules so that the fund can support a specified basket of a given investment. The specified regulations include monitoring indexes or setting standards, for instance, region trading or any other flexible trading methods that cater to low market costs. The most common index is concerned about the regulations set by S&P Dow Jones Indices. Stocks may involve organizations from the United Kingdom or other developed countries or markets that are emerging. Companies are sold off and accounted for the index fund when they meet index rules and are sold out when they don’t follow the set those rules.
2.0 Overview of money market funds and index funds
2.1 Money market
Money market savings are short-term fixed investment security, for instance, bonds offered by the government, acceptances, treasury bills, and commercial paper (Birdthistle, 2010). Money markets are a reliable investment, but they have a lower expected profit than other mutual funds. In most cases, money markets are used for temporary investment purposes.
2.2 Index funds
Index funds track how a particular index works. The mutual fund’s intrinsic value will rise or fall as the index also increases or declines. Index funds tend to have lower charges than mutual funds that are actively managed (Bogle, 2016). The reason for this is that the asset combination manager is not required to make several investment decisions or to do as much research.
2.3 Cost of a share of a fund
Most Money market usually maintains an asset value of one dollar per share, but the price per share depends on changes in the market.
2.4 Money market history
During the 1960s, there were instances of increased interest rates and rising inflation that exceeded the 5% average rate. Investors began losing money, and their savings lost to inflation.
In 1971, Henry Brown and bent established the first money market fund. It was made the fund set aside and was given to investors who were majorly concerned in saving their earning at just a profit margin.
Money market funds in the developed countries developed a solution to the limitations of regulations that limited demand deposits. In the 1990s, interest rates for Japanese banks were almost zero for a more extended period. To fetch higher returns from the low prices in financial institution deposits, business people and other investors shifted to the use of the money market.
.European markets shave always encouraged business people to use banks rather than money market funds deposits that are usually short term. It has been achieved through regulations.
3.0 Index market history
Paul Feldstein and Edward Renshaw suggested the basic model for an index fund in early 1960, their theory for an “Unmanaged Investment Company” earned very little support. They faired on until the index market was developed, other scholars produced a history up to 100 records of market history.
3.01Historical return of the fund
3.02 Index
Expense ratios of index funds record from 0.10% in developed markets to 0.70% for emerging markets. Fewer costs are required to run an index fund because the configuration of a target index is recognized, rather than actively managed funds (Ferri et al. 2013). The expense rate of the relatively large and regularly managed fund is 1.15% as of the year 2015. In most cases, markets earn one U.S. dollar per share.
4.0 Money market
4.1 Investment goal of the fund
Funds that are appropriately managed offer a long-term solution to investors. These goals include longer maturity, lower-rated bonds (Garcia-de-Andoain et al., .2014). Other purposes include choosing the best stock brokers to fetch higher returns to investors, generating earning that would support working culture, increasing the amount of return on the portfolio, and maintaining proper levels of liquidity so that money can circulate easily.
4.2 Advantages of Money Market Accounts
The money market investment fetches higher interest rates compared to other types of accounts held by the bank, including savings accounts, so long as the minimum expected balance is maintained. The interest rate is, compounded, credited, and tied monthly such that a money market account accumulates more revenue.
Money markets have low risks and safe investments because most of them are linked to deposit insurance corporations or other insurance companies up to a limit of $ 250000. (Brady et al. 2012) It makes investments attractive and popular since businesspeople trust insurance companies.
With money markets, an investor will be able to transfer funds between accounts; investors can access their accounts anytime through the use of checks, transfers, ATMs, and online banking.
4.3 Disadvantages of Money Market Accounts
For the money market, account holders need to retain a minimum balance in their account or pay a maintenance fee, which is every month.
The number of withdrawals per cycle is limited in Money markets. Also, the transfer of funds is limited by banking regulations, and this causes inconveniences to investors, especially in cases of emergencies. For instance, every month, Premium Account allows up to a maximum of six withdrawals or transfers.
Money market accounts have fluctuating interest rates due to changes in the market and fees charged for account maintenance (Hamilton et al. 2015). Transaction costs and other financial services lead to a decrease in the value of the account.
5.0 Advantages of index funds
5.1 Low Risk and Steady Growth
Index funds have low risks because they are diversifiable in different sectors in an index hence avoiding losses. They are appropriate for long term growth and perform better than other mutual funds over a long time frame.
5.2 Low Fees
Index funds provide lower fees for customers than other mutual funds. It is because they have fewer transactions and traded less regularly.
6.0 Disadvantages of index funds
6.1 Lack of Flexibility
Mostly index fund should adhere to strategies and policies hence have less flexibility compared to other mutual funds, managers have no option but to perform within the constraints regardless of bad times or good times
6.2 Less Gains
Unlike other mutual funds, these funds cannot outdo the market. Therefore, if one invests in an index fund, they are giving out the possibility of many gains (Inder et al. 2012). In a particular year, the top-performing non-index funds do better than the top-performing index funds. Also, the best non-index funds can do much better than an index fund in a given year.
7.0 Specific risks related to money market fund
7.1 Liquidity risks
It comes up when money market funds get an unexpected massive amount of cash outflows hence no option than to sell due to insufficient liquid assets.
7.2 Reinvestment risk
It is the risk of investing maturing funds at a lower rate and getting a lower-earning than the maturing investment
7.3 Instrument risk
It is a risk that caused by the nonperformance of money market instruments due to adverse effects or events in the market; the events include the additional cost of funds.
7.4 Counterparty risks
It is the risk that debtors will fail to pay back their debts or fulfill their obligation in time, and this will lead to reduced earnings to investors.
8.0 Risks related to index funds
8.1 Stock market risk
It is uncertainty brought about by losing money for a more extended period, for instance, one to seven years (Bekaert et al. 2013). Stock market behavior is perceived to be cruel due to economic changes.
Many index funds are not as diversifiable as other money market funds.
9.0 Management of money market funds
Today money market funds are well managed and positioned to endure financial markets stress, including new domestic debt ceiling. The central proof index funds are they require less time to operate as the businessmen don’t have to use much time checking on different stocks and their combination (Irwin, et al. 2011). A lot of investors usually find it challenging to outdo the performance of the standard S& P500 Index to a lack of knowledge and skills in savings and investing.
9.1 Fees and expenses of the funds
Money market funds usually carry the fees paid to a fund company to manage a money market fund; this is generally known as the expense ratio (Irwin et al. 2011). Other fees involve administrative costs, investment advisory fees, and other operating expenses such as distribution.
Index funds expenses include administrative and recordkeeping, buying and selling co missions, distribution, and marketing charges.
9.2Rationale of investing in index funds and money market funds
Money market funds are generally flexible, short term, and suitable for savings, especially in times of investments (Elton et al. 2011). Index funds are exposed to less risk and can be used for long-term investments.
REFERENCES
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Birdthistle, W.A., 2010. Breaking Bucks in Money Market Funds. Wis. L. REv., p.1155.
Brady, S., Anadu, K. and Cooper, N., 2012. The stability of prime money market mutual funds: sponsor support from 2007 to 2011. Available at SSRN 3015986.
Bogle, J.C., 2016. The index mutual fund: 40 years of growth, change, and challenge. Financial Analysts Journal, 72(1), pp.9-13.
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