Financial Institutions (4)
by Maestri6. Mutual funds are corporations that accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt instruments issued by businesses or government units. These organizations pool funds and thus reduce risks by diversi?cation. They also achieve economies of scale in analyzing securities, managing portfolios, and buying and selling securities. Different funds are designed to meet the objectives of different types of savers. Hence, there are bond funds for those who desire safety, stock funds for savers who are willing to accept signi?cant risks in the hope of higher returns, and still other funds that are used as interest-bearing checking accounts (the money market funds). There are literally thousands of different mutual funds with dozens of different goals and purposes.
7. Pension funds are retirement plans funded by corporations or government agencies for their workers and administered generally by the trust departments of commercial banks or by life insurance companies. Pension funds invest primarily in bonds, stocks, mortgages, and real estate.
Changes in the structure of pension plans over the last decade have had a profound effect on both individuals and ?nancial markets. Historically, most large corporations and governmental units used de?ned bene?t plans to provide for their employees’ retirement. In a de?ned bene?t plan, the employer guarantees the level of bene?ts the employee will receive when he or she retires, and it is the employer’s responsibility to invest funds to ensure that it can meet its obligations when its employees retire. Under a de?ned bene?t plan, employees have little or no say about how the money in the pension plan is invested—this decision is made by the corporate employer. Note that employers, not employees, bear the risk that investments held by a de?ned bene?t plan will not perform well.
Taken From : Five-Minute MBA – Corporate Finance
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