Page 476 - Business Principles and Management

Chapter 17 • Financial Services

often grant check-writing privileges on money market accounts but may require
a minimum amount for the checks. The number of checks written during a given
time period, such as a month, may be limited as well.
Unlike CDs, there is no minimum time the money must remain in the money
market account. Depositors can withdraw their money at any time. Also, initial
deposits may be as low as $500. Investors often put funds in money market
accounts when they will need the money soon or when they want to earn some
interest while waiting for a more profitable investment opportunity. Because
government-backed securities are not very risky, the interest paid on money
market accounts is generally lower than for other stock or bond investment
options. However, money market accounts generally pay slightly higher inter-
est than does a typical savings account.

MUTUAL FUNDS A mutual fund pools the money of many investors primarily for the
purchase of stocks and bonds. Many investors believe they do not have the time
or expertise to select individual stocks and bonds and prefer to purchase shares in
mutual funds. A mutual fund company develops one or more funds and makes the
decisions about the types of investments for each one. Professional fund managers
and their staffs carefully evaluate and select a variety of securities in which to
invest the fund’s money.
Mutual fund investors can choose from among many types of funds, depend-
ing on their investment goals. A growth fund, for example, focuses on stocks
that show potential for rapid growth in the fund’s value. Some investment com-
panies specialize in small, medium, or large companies or in companies from
specific industries such as technology or pharmaceuticals. Some funds invest pri-
marily in international stocks, and others balance their investments across types,
sizes, and locations of businesses.
Risk is a major consideration in selecting mutual funds. There is no guarantee
that the total investment will not be lost if wise investment decisions are not made
by fund managers or if there is a serious economic downturn. Some funds reduce
the level of risk by investing in bonds and relatively safe real estate investments.
Those funds aim to generate a steady income for investors who do not expect the
rapid growth in their investments that more risky funds might produce.
Most mutual funds require a larger minimum investment than the invest-
ment choices already discussed, often $1,000 or more. Also, investors may need
to document that they have adequate financial resources to risk in the mutual
fund investment. Investors can easily transfer money from one fund to another,
but there may be administrative charges for those changes as well as for general
fund management. Whenever sales are made that result in profits on the initial
investment, the investor should consider the tax consequences for those earn-
ings. The return earned in mutual funds has the potential to be quite high but is
accompanied by a much higher risk of loss.

TREASURY INSTRUMENTS The U.S. government borrows money from investors by sell-
ing bills, notes, and bonds backed by the Treasury. Treasury instruments are securi-
ties issued by the U.S. government. They are used to finance the costs of running
the government when income from taxes is not available or when costs exceed the
revenues collected. Treasury instruments are considered one of the safest of all
short-term investments because they are backed by the U.S. government, which has
the resources to meet interest payments on the securities as they become due.
The instruments differ in the term of investment and the interest rates paid.
Treasury instruments are sold at auctions where prospective purchasers bid based
on the interest rate they are willing to accept. The securities are sold at the lowest
available interest rates.

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