Mutual Funds Vs. Financial Intermediaries

by Vicki A. Benge

Mutual funds and financial intermediaries have a few features in common. However, in broad terms, the two differ considerably in that the most typical types of financial intermediaries funnel money from savers to spenders and mutual funds are a type of investment product. Both mutual funds and financial intermediaries accept money from consumers, what each does with the funds after acceptance differs.

Understanding Financial Intermediaries

A financial intermediary can be the go-between to bring together an investor and an investment product, a stopgap for temporary placement of funds or an institution that provides a financial service to the consumer. Examples of financial intermediaries include commercial banks, savings and loan associations, pension funds and insurance companies, to name a few. Financial intermediaries funnel money from investors and savers to spenders and borrowers.

Benefits of Financial Intermediaries

Financial intermediaries, such as banks, may provide demand deposits accounts and funds deposited are insured. Others, such as brokerage firms, may accept deposits without providing the investor instant access but provide a bridge between investors and the markets. An insurance company, a type of nondepository financial intermediary, offers an essential service to consumers by providing protection against risk. Pension funds are also considered financial intermediaries and give workers a means to save and pay for retirement.

Understanding Mutual Funds

A mutual fund is an investment company that uses pooled money from a group of people to purchase investment products. Mutual funds may invest in stocks, bonds, money market instruments, real estate or other types of products. A mutual fund aims to increase shareholder wealth through investing in products that pay interest or dividends, or appreciate over time.

Benefits of Mutual Funds

Investors interested in mutual funds have a plethora of products from which to choose. According to the February 2011 issue of "SmartMoney" magazine, there are 6,800 mutual funds in the United States alone. This wide availability offers something for everyone, from funds that invest only in fish products to those that choose solely environmentally friendly companies. Mutual funds permit investors with a limited amount of cash to invest and obtain instant diversification by choosing from broad market index funds and balanced funds that hold a mixture of stocks and bonds. Buying shares of mutual funds also greatly reduces transactions costs when compared with the charges associated with accumulating a diverse portfolio of stocks, bonds and money market instruments individually.

A Simple Comparison

Mutual funds do not generally provide immediate access to an investor's funds, as does a financial intermediary such as a commercial bank. Although open-end mutual funds permit the shareholder to redeem funds at any time, the process generally takes 24 to 48 hours to complete. Conversely, access to deposit accounts via debit cards provides around-the-clock access to most demand accounts. Other financial intermediaries, such as the Federal Reserve, plays no direct role in the finances of private investors.

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