What Types of Financial Institutions Do We Know?
First thing that people think of when hearing words financial institutions are banks. But banks are not even near to be the only financial institutions. In this article I will talk a little bit about other financial institutions. I will focus on investment funds and mutual funds, because I think many people don’t even know what’s the difference.
Both financial institutions mentioned above are created with purpose of diversification. People who do not have lots of funds to invest with usually seek for ways to achieve diversification through different financial institutions. Investment funds and mutual funds are perfect for these task. Let’s explain how they work.
Many people give in money to that institution and that mutual or investment fund then buys investments based on their investment policy usually described on their website and/or sign in forms. This gives you some sort of power to where your money goes. Of course there are investment and mutual funds that don’t invest in any specific field of work, they spread their investments all over the place. That eliminates the risk very much, almost totally, but the return on investment is also much lower.
So now that you understand what these two financial institutions do, let’s take a look at what is the difference between them.
Investment funds
These work like regulary companies. You buy their shares over stock market and as they invest and achieve returns, you get them in the form of capital gains and/or dividends. In case company goes does you loose it all. Also you can’t get all your money of the investment fund if you don’t find a buyer and this is the main difference between investment funds and mutual funds.
Mutual funds
Mutual funds are also companies, but you don’t buy their shares, you buy their points. You always know how much each point is worth and as the fund makes some returns, the value of your point goes up. The best part of mutual funds is, that you can get money out anytime you want. You don’t have to seek the buyer for your points, you just have to ask them to pay you out. In this view mutual funds are much better than investment funds, but because of the need for liquidity they cannot take on all investments making their returns a little smaller then returns of investments funds.
Written by: Matt
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Tagged as financial institutions, financial management, investing, investment funds, investments, money management, mutual funds + Categorized as Economy articles, Finance