What Do Mutual Funds Do? Mutual Funds and Financial Intermediation

Mutual funds are analyzed from a risk management perspective to explain their existence as financial intermediaries. Due to their organizational features, in particular the open-end capitalization and the marked-to-market valuation, mutual funds simultaneously allow for diversi cation, asset accumulation and insurance against liquidity risk. The costs of the liquidity provision in form of negative externalities can be reduced by an adequate fee structure. Although the confl icts of interest between mutual funds and their shareholders cannot be eliminated completely, they can be minimized by the market power of the shareholders