KPI of the Day – Investment: # Mutual fund liquidity ratio
Definition
Compares the amount of cash to the total assets held by a mutual fund.
Purpose
To assess the liquidity of mutual funds.
Recommendations
Mutual funds play an increasingly important role in the finance industry, as well as the global economy overall. Inevitably, the active administration of mutual funds has come under scrutiny. Depending on the size of the administering company, the level of expectations may vary. It is, however, commonly agreed that investors are expecting a complete and comprehensive liquidity report on the mutual funds managed for them.
The # Mutual fund liquidity ratio is therefore used to reveal the amount of cash held by a mutual fund, relative to its assets. A mutual fund that has a high # Liquidity ratio is one in search for profitable investment opportunities, and therefore reveals a bearish sentiment towards the market. A mutual fund with a low # Liquidity ratio has already invested in the opportunities it has been searching for, therefore bearing a bullish sentiment towards the market.
Financiers who have sound financial skills would be looking to balance mutual fund cash and investments accordingly. As the # Liquidity ratio presents a numeric value of the mutual fund’s cash position, financiers are expected to make strategic choices when managing such funds.
These strategic choices are based on the data that KPIs such as the # Mutual fund liquidity ratio conveys. Moreover, with the help of such indicators, financiers can gain insight into the bearish and bullish inclinations of portfolio managers in the industry. This comes in handy in the process of picking stocks and managing investor portfolios.
Economic and market situations can influence the decisions made by mutual funds’ managers. For example, mutual fund managers have more incentive to hold cash when interest rates are high. The results of this KPI are often published on a monthly basis.
A reasonable level of this KPI is desirable. A high ratio indicates that the mutual fund is having difficulty finding investments with solid returns, while a low level may indicate the low ability to meet the redemption requirements of customers.
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Tags: Investments, KPI
