Principles of Financial Stability of Investment Funds

Abstract

The purpose of this work is to substantiate the principles of financial stability of investment funds, which are inverse (opposite) to the principles of creating financial pyramids. The elements of scientific novelty include the specification of the peculiarities of compliance with the principles of financial stability of investment funds in modern conditions in Ukraine. An investment fund is also a kind of financial pyramid, but it can be created on the basis of the principles of stability, which are the opposite of the rules of existence of fraudulent financial pyramids. The such principles are defined as: dominance of assets over liabilities and minimization of overhead costs (including advertising); income from assets must exceed the value of liabilities; use of financial leverage or formation of assets according to a certain rule, which cannot be achieved by an individual investor; transparency and controlThe economic reasons for the existence of investment funds are considered, and the reasons for the success of individual financial institutions, which are essentially the relevant funds: Vanguard S&P 500 ETF and Berkshire Hathaway, are analyzed. The structure of the balance sheet of the investment fund is determined, which allows to adhere to certain principles of financial stability and use financial leverage. It is specified that an individual investor (individual) cannot use financial leverage for investment activities in the stock market, as it cannot issue bonds. The use of borrowed funds (broker or bank loans) allows an individual investor to make only short-term speculations that are very risky. At best, the average individual investor will only succeed in reaching the level of the S&P 500 stock index, while the investment fund will be able to exceed this index through the use of financial leverage.

Keywords

• financial pyramid
• investment fund
• stocks
• bonds
• financial leverage