The Alternatives:

A financial intermediary is an entity that acts as the middleman between two parties in a

financial transaction, such as a commercial bank, investment banks, mutual funds and pension

funds. Financial intermediaries offer a number of benefits to the average consumer, including

safety, liquidity, and economies of scale involved in commercial banking, investment

banking and asset management.

Financial intermediaries come in different forms depending on its type and the functions it

performs. In order to come up with the more accurate answer, these intermediaries can be divided

into two: banking and non-banking financial intermediaries.

Banking financial intermediaries includes depository institutions. Examples of this are

commercial banks, savings and thrift banks. On the other hand, non-bank financial intermediaries

are those other than the said banks. It includes institutions such as life insurance companies, mutual

funds, pension funds, building societies, etc.

In comparison, it is evident that NBFIs’ growth is much faster than the commercial bank

although it is the most common type of financial intermediaries. It is because of the difference

with regards to the interest rates and charges. NBFIs offer higher interest rates to the depositor

while charging lower interest rates to the borrowers.

Apart from these, there is still other type of financial intermediary that perform the same

role. This is the investment intermediary whose primary objective is to maximize returns from

investments. To be more specific, it is the asset management firms that may perform the function

bring referred to the problems which will be discussed later on.

The Decision:

As what is being asked are the intermediaries that help in channelizing household savings to

most productive use, this part will focus on intermediaries under the non-bank financial

intermediaries (NBFIs’). Non-bank financial intermediaries have different functions as a mix of a

wide range of institutions from leasing and factoring as well as venture capital to various types of

contractual savings and institutional investors. Although can relate to the function of commercial

banks, NBFIs filled the gaps in the functions of banks with its service variation. The common

characteristic of these institutions is that they mobilize savings and facilitate the financing of

different activities, but they do not accept deposits from the public.

● Mutual funds

These are pooled investment vehicles where funds of individual investors are

collectively invested in financial assets. Individuals save and invest in mutual funds and

their investments are in turn invested by mutual fund managers in shares and bonds issued

by corporations.

Mutual funds provide active management to these pooled capital of investors.

These also pool small savings from individuals which enables bigger investment fund.

Thus, benefiting small investors by taking part in a much larger investment trust which will

come from small commission rates that are only available to big purchases.

ADVANTAGES:

🗹 Advanced Portfolio Management 🗹 Expert/Professional

🗹 Diversification Management

🗹 Convenience and Fair Pricing

🗹 Range of Investment Options and Objectives 🗹 Dividend Reinvestment

🗹 Affordability 🗹 Risk Reduction (Safety)

🗹 Flexibility 🗹 Liquidity

DISADVANTAGES:

🗷 High Expense Ratios and 🗷 No Control Over Portfolio

Sales Charges 🗷 Capital Gains.

🗷 Management Abuses 🗷 Fees and Expenses.

🗷 Tax Inefficiency 🗷 Over-diversification

🗷 Poor Trade Execution 🗷 CashDrag

● Pension Funds

These may be defined as forms of institutional investor, which collect, pool and

invest funds contributed by sponsors and beneficiaries to provide for the future pension

entitlements of beneficiaries. It provides means for individuals to accumulate savings over

their working life so as to finance their consumption needs in retirement, either by means

of a lump sum or by provision of an annuity, while also supplying funds to end-users such

as corporations, other households or governments for investment or consumption.

These are typically sponsored by employers in which accordingly, both the

employer and the employee make the contribution. Pension saving, as treated more
favorably, leads to greater flows of savings directed through pensions. Its growth is

dependent on the generosity of public social pensions.

Its primary objective is to provide pensioners who have reached retirement age with

income in the form of a lifetime pension or capital. Pension funds provide risk control

directly to households via the forms of retirement income insurance they provide, an

advantage which largely reflects the unusual (among financial intermediaries) link

of pension funds to employers.

ADVANTAGES:

🗹 Tax relief

🗹 Compound interest

🗹 Employer contributions

🗹 Guaranteed income at the end

DISADVANTAGES:
 🗷 Lack of access

🗷 Risk of poor returns

🗷 Too complicated

The Execution:

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