Mutual funds remain the central instruments investors use to achieve their financial goals. Whether for retirement or in the search for additional profits, individual and corporate investors choose mutual funds as a relatively reliable and non-volatile method of making investments. It appears, however, that apart from satisfying the needs of individual investors, mutual funds can successfully work to secure corporate market players from changes and shifts in external markets.
In this context, J. P. Morgan is the bright example of the way mutual funds are used to reduce the negative impact of financial crisis and to overcome the difficulties faced in tough bond markets. J. P. Morgan has probably been the first to use mutual funds as the instrument of protection against the negative impacts of financial crisis. In his article, Michael Pollock (2009) sheds the light on the way J. P. Morgan Strategic Income Opportunities fund helps the company deal with tough bond markets.
It appears, that the fund “has few restrictions typical of bond funds that are marketed to general public” (Pollock, 2009); as a result, it is better equipped to help investors survive through the difficult financial times. The fund functions according to a predetermined set of principles, of which putting money only into places where potential profits overweigh potential risks is probably the most important. The mutual fund at J. P. Morgan does not avoid keeping a portion of assets in cash, so that investors can materialize their investment opportunities when the right moment comes.
Short selling is just another instrument the fund uses to generate additional profits; Pollock (2009) also notes that short selling is becoming a widely spread investment tool among bond funds. The list of investment instruments J. P. Morgan uses to manage its mutual fund is not limited to short selling and cash operations. Here, investors are also given a chance to make short borrowings and then to sell these borrowed shares; “investors can also make similarly bearish bets by buying credit-derivative instruments whose value increases if the price of an underlying corporate bond declines” (Pollock, 2009).
To a large extent, the fund relies on the whole set of quantitative techniques that work to identify significant investment opportunities. The fund is actively involved into managing long-term high-yield corporate securities and nonagency mortgage-backed bonds. As a result, the fund has been able to achieve the total return rate of 4. 3% this year (Pollock, 2009). Does that mean that beyond using mutual funds as investment targets and the sources of additional profits, companies can also utilize the benefits of portfolio investment to protect themselves from external crisis threats?
There is no definite answer to that question, but J. P. Morgan obviously tries to change traditional opinions about investment options available to consumers. The truth is that everything we currently know about mutual funds does not make them look as an ideal investment solution. Given that mutual funds are not usually guaranteed by the FDIC and are not insured by any government agency; that mutual funds’ past performance is not always indicative of its future positive prospects; and that to be a member of a mutual fund also means to bear certain costs associated with investments, the whole picture of a mutual fund does not look as much attractive.
However, where J. P. Morgan was able to reach the point of total return rate of 4. 3%, investors may have some sort of confidence that the company will pursue the same set of investment principles, being extremely cautious in its investment options and using the mutual fund as an effective means of anti-crisis protection. Conclusion Mutual funds are included into the list of the most widely used investment options.
It appears, however, that mutual funds can also be successfully used to protect companies and investors from the negative impact of the financial crisis. Despite the costs investors have to carry as well as unpredictability of external environments, which mutual funds cannot control, the latter remain relatively stable and non-volatile means of dealing with tough bond markets.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 10 October 2016
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