Mutual Funds Pre and Post Global Financial Crisis - Essay Example

Equity funds have the highest return potential as well as the highest risk potential because equity funds invest in stocks that are subject to significant volatility. On the other end of the return spectrum, money market funds have the lowest risk potential as well as the lowest return potential, as these types of mutual funds invest in fixed income securities of high quality and short-term duration, including Treasury bills and certificates of deposit.

Fixed income funds are riskier than money market funds but also have a higher return potential. This type of mutual fund is focused on bonds, mortgages, and debentures. Balanced funds are riskier than fixed income funds, but not as risky as equity funds, which are typically made up of both stocks and fixed income instruments. This type of mutual fund invests in different asset classes depending on opportunities detected by the mutual fund manager. The financial crisis of 2007–2009, also known as the Global Financial Crisis (GFC) and 2008 financial crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.

The GFC can be divided into two distinct phases (Mishkin, 2011). The first and more limited phase from August 2007 to August 2008 stemmed from losses in one relatively small segment of the U.S. financial system – namely, subprime residential mortgages. In mid-September 2008 however, the financial crisis entered a far more virulent second phase. In rapid succession, the investment bank Lehman Brothers entered bankruptcy on September 15, 2008; the insurance firm AIG collapsed on September 16, 2008; there was a run on the Reserve Primary Fund money market fund on the same day, and the highly publicized struggle to pass the Troubled Asset Relief Program began. Many view the Lehman bankruptcy as the key event that morphed the subprime crisis into a virulent global financial crisis.
The pre-crisis period was characterized by a relatively higher than the historical average global GDP figure.