Monday, 6 September 2010

Are Mutual Funds the Future of Banking?

Almost-every organisation is feeling the strain on financial institutions at the moment. Following such a monumental economic collapse this is not surprising- but could mutual funds be the future of commercial and corporate banking?

Brief introduction.
Mutual funds are collective groups of individuals who have invested, through an investment manager, in one particular commodity or security. As these are entirely investor funded, even if the investments fall to no return whatsoever it is nigh on impossible to bankrupt a mutual fund. This is quite simply because they have no outside liabilites, no borrowers and lenders- only those investors who have parted with their money for returns at a later date.

How does this apply to the future of banking (and partially the economy as a whole)?
Well, most of the recent economic collapse can be attributed to organisations or individuals borrowing beyond their limits. Once faced with paying back the exoberant loans they defaulted, the banking system couldn't react to so many losses on the liability front and the financial system started to collapse.
In an effort to hold onto some of the valuable securites held by financial institutions governments intervened and provided funding to field the short fall.
For some of these institutions this was a successful plan but for many others they simply struggled under increasing debts before defaulting, bankrupting and disappearing entirely.

The advantageous approach.
An element of profit exists as without a comparable difference between lendings and returns- there is no profit to speak of. And with most banks and financial institutions being privately funded, well, there's no way they can feasibly survive with little to no profit.

Mutual funds, on the other hand, make most of their profits via fees and the difference between investment costs and investment returns. Not to say they fraud or specifically undermine investments, but that as the economy is always changing there will always be a deficit or even a surplus.
In this way, they are without the greatest aspect of the recent financial failure- they don't lend, borrow nor have several hundred creditors and liabilites. They are entirely investor funded and the worst possible result is that they can make no return, they cannot collapse as long as their initial and basic costs are covered (which they will be)

If banks could alter their practice to fit within these rules and ideas they could possibly become more self-sufficient and near immune to a collapse.

The result of the change.
Although, such a large shift in the financial and economic framework of any country would create an incredible deflation. As, quite simply, there will be less money to pass around than before as you would only be lending/borrowing within your limits.
It is an interesting idea and not one without merit as the economy does need a fresh, new and focused kickstart. Banks, for instance, could be one of the first organisations to adopt the change and show how profitable this approach could (and would) be on a large scale.

What are you views-
Do you think such a system could exist?
Is this a viable alternative to the system currently in place?
Do you think financial institutions will adopt this?

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All information presented here is © copyright Carkean Solutions Ltd., 2010 - Not to be used without our permission - The views expressed here are the views of an individual not the corporation

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