Banks and Investment Funds

The participation of institutions that, traditionally, have competed with mutual funds for investment customers is one of the most noteworthy aspects of the surge in popularity of mutual funds as an investment vehicle. For instance, commercial banks are flooding the mutual fund industry in droves in order to compete. According to estimates provided by the American Bankers Association (ABA), approximately 3,500 financial institutions, or close to one-third of all U.S. banks, are now engaged in the sale of mutual funds. Some firms do nothing more than refer clients to brokerage firms located elsewhere, while others also manage their own mutual funds.

The provision of mutual funds is seen as a win-win activity by the majority of industry participants due to the numerous benefits that these products provide both for banks and the customers they serve. Not everyone in leadership positions in Congress and among federal and state regulators is confident. They are concerned that some of their banking customers won’t understand the risks that are inherent in mutual fund investments, particularly the fact that mutual fund investments are not insured and the possibility that they will lose their initial investment. This sort of confusion among customers has the potential to turn a successful formula into a losing proposition.

Mutual Fund

These individuals and institutions are the fund’s shareholders as well as its customers. A mutual fund is a company that pools funds and makes investments on behalf of individuals and institutions that have similar investment goals. Small investors who desire a diversified risk profile and professional money management are the perfect candidates for mutual funds. In order to achieve their financial objectives, investors in mutual funds have the option of selecting some combination of money market, bond, income, and equity funds.

Shareholders of mutual funds can earn money in three different ways: through dividends, through capital gains if the fund’s securities are sold at a profit, and through share appreciation if the value of the securities held in the fund goes up. Redeeming shares in a mutual fund is a simple process, and many funds even offer additional perks, such as the ability to write checks, make purchases through payroll deduction, and trade funds within the same family of funds.

Recent Trends in the Industry

Prior to the early 1970s, the fortunes of mutual funds, as well as their market share, rose and fell in tandem with the performance of the bond and stock markets. The decade of the 1970s saw the advent of money market mutual funds, which served as a significant driving force for the industry (MMMFs). Short-term funds known as money market mutual funds (MMMFs) are investments made in high-quality, highly liquid assets such as commercial paper, large certificates of deposit (CDs), and Treasury bills. Small investors, many of whom were making their first investment, were able to participate in the money market for the first time as a result of the development of these funds, which enabled them to earn higher returns than they would have been able to get from deposit products. The money market had previously been dominated by wealthy individuals and large institutions. Nearly three-quarters of the market for mutual funds was controlled by taxable and tax-exempt MMMFs by the time 1982 came to a close.

Banks and Mutual Funds

Why then are banks urging their customers to do business with industries that are in direct competition with them? Banks are now offering mutual funds as a means of generating fee income in response to the intensifying competition they face in the loan and deposit segments of their businesses. But perhaps even more importantly, financial institutions want to maintain a steady flow of customers through their doors. The phrase “maintaining long-term customer relationships” has become something of a buzz phrase in the banking industry, and one way in which bankers are attempting to do so is through the sale of mutual funds.

After the authorization of money market deposit accounts (MMDAs) in December 1982, financial institutions were essentially given the green light from the regulatory community to begin directly competing with the mutual fund industry. MMDAs are insured deposit accounts that yield a variable interest rate; the rates paid on them are related to the return that banks receive on their investments in Treasury bills, commercial paper, and jumbo CDs, which are essentially the same assets in which MMMFs are invested. MMMFs are referred to as money market mutual funds. At the expense of their rivals, MMDAs quickly established themselves as market leaders in terms of consumer demand. After the initial implementation of MMDAs, there was a five-month long decline in both the dollar value of time and savings deposits held at depository institutions as well as the assets held by MMMFs.

Conclusion

These individuals and institutions are the fund’s shareholders as well as its customers. A mutual fund is a company that pools funds and makes investments on behalf of individuals and institutions that have similar investment goals.Prior to the early 1970s, the fortunes of mutual funds, as well as their market share, rose and fell in tandem with the performance of the bond and stock markets. The decade of the 1970s saw the advent of money market mutual funds, which served as a significant driving force for the industry (MMMFs). After the authorization of money market deposit accounts (MMDAs) in December 1982, financial institutions were essentially given the green light from the regulatory community to begin directly competing with the mutual fund industry.After the initial implementation of MMDAs, there was a five-month long decline in both the dollar value of time and savings deposits held at depository institutions as well as the assets held by MMMFs.