What are Investment Funds?

An investment fund is a business that takes capital from multiple investors and uses this accumulated sum to invest in securities. They allow for seasoned professionals to give investors a wider range of opportunities for investment than they could consider on their own. Since the reserves used by the fund will be accumulated, investing is much easier with far smaller sums of money. When choosing these funds, investors should pay attention to certain factors. These factors could be how risky the practices of the fund are, how expensive they may be, and the type of fund it is.

There is a wide range of investment funds for you to choose from, and we will guide you through all of them below. If you have any concerns with your fund’s practices, the best thing to do is contact the fund manager. They decide where and how the securities are invested.

Types of investment funds

Mutual funds

These funds take sources of income from multiple investors and use these resources to invest in many different assets. They are usually carried out by experienced professional traders. All of the investors hold

a portion of the shares, proportional to the size of their investment. Their losses and gains are again proportional to the size of their investment. These asset management companies do not give investors voting rights, so investors should be careful in deciding if they are making worthwhile investments. Investors then earn income through dividends, or capital gains from securities sold. Investors may or may be able to receive their profits when they want, depending on whether the fund is open-end or closed-end. They tend to have fees in commission, sales charges and redemption fees. All of these fees can accumulate up to around 1-3% of your profits.

Mutual funds can further be divided into equity funds, bond funds, fixed-income funds, index funds, balanced funds, money market funds, income funds and many more. Equity funds and bond funds represent some of the most basic version of these funds. Equity funds usually make their investments in the stock market, whereas bond funds are obviously more focused on bonds. Most mutual funds keep their information private, which means investors do not need to divulge information on their profits. We will briefly discuss two of the more unusual of these funds.

Exchange-Traded funds (ETFs)

These are actually a collection of securities that track the movement of stock or bond indexes. They have only appeared relatively recently, but have been quite exciting opportunities for many investors. You can

buy or sell them through brokerage firms on the stock exchange. An investor can use them for all sorts of assets, from the forex market to the commodity market. ETFs issue and redeem stocks constantly in multiple assets, which the fund manager determines. These funds are not anonymous. They appear on the stock exchange like any other stock and are relatively easy to follow. They are essentially a stock that contains multiple different stocks within. The transparency they offer makes them quite a popular option for investors. One example of these funds is the SPDR S&P 500 ETF Trust.

Money Market funds

These funds are relatively low risk and reliable. They make many short-term investments, with small chances of failure. These investments tend to be in liquid assets, i.e. cash. Of course, on the flip side they make relatively low profits for their investors. Investors usually use them in the short term, to keep their funds temporarily while finding other opportunities. They are also quite accessible, allowing relatively low investments. Some examples of these are the Invesco Premier Portfolio, or the Vanguard Money Market.

Hedge funds

This is an investment management company that generally only allows accredited investors to participate. As such, only investors with high net-worths are able to take part in them. The funds usually do not allow the investors to withdraw their sum for less than a year (this is the lock-up period). When withdrawals are made, they are set at very particular points in time. They look hard for incredibly promising but quite risky opportunities which could return huge profits. Many different types of hedge funds exist, including those that use event-driven strategies, equity arbitrage, mortgage arbitrage, emerging markets and many more. One of the most important hedge funds is Bridgewater Associates. They have $160 million assets under management (AUM) as of 2019. Another worth mentioning is Renaissance Technologies, with an AUM of $68 billion as of 2019.

Open-end vs Closed-end funds

A fund can also differ in whether they deal with asset management in an open-end or closed-end way. It is essential that you pay attention to the type you choose, as it can affect the nature of your investment significantly.  Both invest in the open market but have a vital difference.

Open-end funds allow investors to invest and withdraw their money at any time they desire. As investors redeem their money from the fund, the fund then retires the stocks it had invested in. They also have no limit for just how much liquidity can be invested in the company.

Closed-end funds, however, do not allow investors to add and remove money when they so please. After the fund offers their initial public offering (IPO), an investor can put their money towards a stock. After this, investors do not have power over trading the shares themselves. The funds control the stock exchanges personally. Investors will then reclaim their money by the fund’s own decision, or several other factors. These funds compensate for their restrictions by offering their clients discounts and bonuses. We have not yet mentioned any funds that could be considered closed-end, although they do closely resemble ETFs. Some of these could be municipal bond funds, taxable bond funds, global/international funds, and others.

Conclusion

These are some of the types of funds available to you. As we have said many others exist, which we could not cover in this article. Regardless the hope is that this article has introduced you to enough for you to make a start. So, it seems as though there is a great range of opportunities for an investor looking to invest in a fund. The important thing for them is to make sure you know the details before getting involved.