The flow of funds is the movement of money to and from various national economic sectors. Usually the flow of funds is collected and analyzed by a central bank in a country. Accounts from the flow of funds are usually used as indicators of economic performance.
Governments, investors, and financial managers monitor the flow of funds to determine how effective plans have been made, the types of resources owned, how resources have been invested, and what resources are used to finance resources.
How to Measure Funds Flow
- Mutual Fund Cash Level Investors can see the level of mutual funds to determine how much money an investor must have to buy shares . When the level of mutual funds is low, it shows that institutional funds do not have a lot of cash that can be used to invest in new shares. When an institution has a high level of mutual funds, it shows that the institution has enough capital to be used to buy shares.
- Marginal Debt Marginal debt is another way to see the movement of money in and out of the economy. When the market is bullish , investors tend to invest everything they have into the market in the hope of getting a profit. Such investor behavior occurs when the margin debt level is at the highest level because the investor has the option to use a cash account to close all investments or use a margin account.
Margin accounts are offered by brokers to facilitate the purchase of securities by investors. When a large amount of margin debt has been used to purchase securities, it confirms that there is a large movement of money in the national economy.
Benefits of Fund Flow Indicators
- Performance Indicators The government uses indicators of fund flow as a broad indicator of economic performance. Comparing existing data with previous data can show economic strength and trends from previous years. It can also show the direction of the economy in the future, and specific sectors that will lead to its growth.
- Monetary Policy Formulation The government can use the data flow of funds to formulate monetary and fiscal policy . After implementing a policy, the government can use indicators to determine whether the policy brings stability or economic fluctuations, and find ways to overcome its negative impacts.