Why have funds replaced most of direct finance in recent decades? How has their growing importance...

Why have funds replaced most of direct finance in recent decades? How has their growing importance changed the way our economy (and our financial system) works? Distinguish between the different types of funds dominating today's financial system!

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Expert Solution

Funds have replaced most of direct finance because of the following advantages that they provide:

Funds take on the responsibility of investing somebody else's money which lets people concentrate on their own day to day lives rather than try and figure out investing opportunities.
Funds are run by veteran investors who can invest in much better and informed ways than individual retail investors.

Growing importance of funds has led to a lot of money getting concentrated on the balance sheets of a few. This has impacted the economy both in good and in bad ways. The good thing is that liquidity is easy to come by in the financial markets now. Any financial institution or corporation in need of funds can easily raise money. The bad thing is that concentration of money means that one bad decision can wipe out a lot of wealth which is what happened in the financial crisis. Too few people were making decisions about huge sums of money.

The different types funds are mutual funds, hedge funds, pension funds, insurance companies etc.

jeff jeffy answered 1 year ago

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