Mutual Funds, Pension Funds, Insurance Companies, Finance Companies, and Other Financial Institutions Money and Capital Markets 17 C h a p t e r Eighth Edition Financial Institutions and Instruments in a Global Marketplace Peter S. Rose McGraw Hill / Irwin Slides by Yee-Tien (Ted) Fu
Mutual funds , or investment companies , direct the savings of individual investors into bonds, stocks, and money market securities.
A small saver who buys mutual fund shares gains opportunities for capital gains and indirect access to higher yielding securities that can be purchased only in large blocks, and yet still enjoys price stability, low risk, and high liquidity.
Investment companies first developed in the U.K., and then made their appearance in the U.S. in 1924 as a vehicle for buying and monitoring subsidiary corporations.
Since then, the traditionally stock-investing industry has seen many innovations – bond funds, money market funds, index funds, global funds, vulture funds, small/mid/large-cap investment companies, and hedge funds.
Defined contribution plans specify how much must be contributed each year in the name of each worker, but the amount to be received when retirement is reached will vary depending upon the amount saved and the returns earned on accumulated savings.
The funds saved belong to the employee, and are portable.
Pension Funds Assets of Pension Funds $ Billions Data Source: Board of Governors of the Federal Reserve System
The principal kinds of policies sold by life insurance companies include ordinary or whole life, term life, endowment, group life, industrial life, universal life, variable life, adjustable life, and credit life insurance.
Many policies combine financial protection against death, disability, and retirement with savings plans to help the policyholder prepare for some important future financial need.
Life Insurance Companies in the U.S. Data Source: American Council of Life Insurers
The insurance business is founded upon the law of large numbers – a risk that is not predictable for one person can be forecast accurately for a sufficiently large group.
So, life insurers invest the bulk of their funds in long-term securities, and frequently follow a “buy and hold” strategy. They generally pursue income certainty and safety of principal in their investments.
Life Insurance Companies Source: Board of Governors of the Federal Reserve System 17 -
Life insurers are under increasing pressure to develop new services.
Among the most important recent innovative services are universal and adjustable life insurance, variable premium and variable life insurance, mutual funds, tax shelters, venture capital loans, guaranteed investment contracts, corporate cash management systems, and deferred annuities.