Fund: Definition, How It Works, Types and Ways to Invest (2024)

What Is a Fund?

A fund is a pool of money that is allocated for a specific purpose. A fund can be established for many different purposes: a city government setting aside money to build a new civic center,a college setting aside money to award a scholarship,or an insurance company that sets aside money to pay its customers’ claims.

Key Takeaways

  • A fund is a pool of money set aside for a specific purpose.
  • The pool of money in a fund is often invested and professionally managed in order to generate returns for its investors.
  • Some common types of funds include pension funds, insurance funds, foundations, and endowments.
  • Funds are also used by individuals and families for personal financial matters, such as emergency funds and college funds.
  • Retirement funds are common funds offered as a benefit to employees.

How Funds Work

Individuals, businesses, and governments all use funds to set aside money. Individuals might establish an emergency fund—also called a rainy-day fund—to pay for unforeseen expenses or a trust fund to set aside money for a specific person.

Individual and institutional investors can also place money in different types of funds with the goal of earning money. Examples include mutual funds, which gather money from numerous investors and invest it in a diversified portfolio of assets, and hedge funds, which invest the assets of high-net-worth individuals (HNWI) and institutions in a way that is designed to earn above-market returns. Governments use funds, such as special revenue funds, to pay for specific public expenses.

Types of Funds

The following are examples of fundscommonlyused for personal ventures:

  • Emergency funds are personal savings vehicles created by individualsused to cover periods of financial hardship, such as job loss, prolonged illness, or a major expense. The rule of thumb is to create an emergency fund that contains at least three months' worth of net income.
  • College funds are usually tax-advantaged savings plans set up by families to allocate funds for their children’s college expenses.
  • Trust funds are legal arrangements set up by a grantor who appoints a trustee to administer valuable assets for the benefit of a listed beneficiary for a period of time, after which all or a portion of the funds are released to the beneficiary or beneficiaries.
  • Retirement funds are savings vehicles used by individuals saving for retirement. Retirees receive monthly income or pensions from retirement funds.

In the realm of investments, some types of funds include:

  • Mutual funds are investment funds managed by professional managers who allocate the funds received from individual investors into stocks, bonds,and/or other assets.
  • Money-market funds are highly liquid mutual funds purchased to earn interest for investors through short-term interest-bearing securities, such as Treasury bills and commercial paper.
  • Exchange-traded funds (ETFs) are similar to mutual funds butare traded on public exchanges (similar to stocks).
  • Hedge funds are investment vehicles for high-net-worth individuals or institutions designed to increase the return on investors’ pooled funds by incorporating high-risk strategies such as shortselling, derivatives,and leverage.
  • Government bond funds are for investors looking to put their money away in low-risk investments through Treasury securities—such as Treasury bonds—or agency-issued debt—such as securities issued by Fannie Mae. Both alternatives are backed by the U.S. government.

The government also creates funds that are allocated for various reasons. Some government funds include:

  • Debt-service funds are allocated to repay the government’s debt.
  • Capital projects fund resources are used to finance the capital projects of a country, such as purchasing, building, or renovating equipment, structures, and other capital assets.
  • Permanent funds are investments and other resources that the government is not allowed to cash out or spend; however, the government normally has the right to spend any revenue these investments generate on appropriate functions of government.

How Do You Start a Fund?

Depending on what type of fund you want to start will depend on how you start it. If it is an emergency fund, a simple way to start one is to set aside a small portion of money every week or month in a separate bank account. If you are interested in starting an investment fund, this is more complicated. You would first need to have a professional background, raise money to start the basics of a fund, such as incorporating it and any trading equipment, then you would need to decide on an investment strategy, then attract investors willing to invest capital into your fund.

What Is the Purpose of a Fund?

The purpose of a fund is to set aside a certain amount of money for a specific need. An emergency fund is used by individuals and families to use in times of emergency. Investment funds are used by investors to pool capital and generate a return. College funds are usually set up by parents to contribute money to a child's future college education.

What Is an Example of a Fund?

An example of a fund is a mutual fund. Mutual funds accept money from investors and use that money to invest in a variety of assets. Mutual funds have managers that manage the fund, which they charge a fee to investors for. Investors allocate money to mutual funds in hopes of increasing their wealth.

The Bottom Line

A fund is a pool of money that has been created for a specific reason. There are different types of funds for different purposes. An emergency fund is created by individuals and families for emergency expenses, such as medical bills or to pay for rent and food if someone loses a job.

An investment fund is an entity created to pool the money of various investors with the goal of investing that money into various assets in order to generate a return on the invested capital. Individuals, governments, families, and investors all use funds for very different purposes but the essential goal remains the same: to set aside a certain amount of money for a specific need.

Fund: Definition, How It Works, Types and Ways to Invest (2024)

FAQs

Fund: Definition, How It Works, Types and Ways to Invest? ›

Key Takeaways. A fund is a pool of money set aside for a specific purpose. The pool of money in a fund is often invested and professionally managed in order to generate returns for its investors. Some common types of funds include pension funds, insurance funds, foundations, and endowments.

What is a fund and how does it work? ›

Funds are collective investments, where your and other investors' money is pooled together and spread across a wide range of underlying investments, helping you spread your overall risk. The value of investments can fall as well as rise and you could get back less than you invest.

How do I invest in a fund? ›

How to buy funds. Once you have an account, you simply search for the fund you want to buy and choose a quantity or value – whichever you choose, you need to have enough money in your account to cover both this and any charges to buy.

What are the three types of funds? ›

The Generally Accepted Accounting Principles (GAAP) basis classification divides funds into three fund categories: governmental, proprietary, and fiduciary.

How many types of investment funds are there? ›

An investment fund provides a broader selection of investment opportunities, greater management expertise, and lower investment fees than investors might be able to obtain on their own. Types of investment funds include mutual funds, exchange-traded funds (ETFs), money market funds, and hedge funds.

How do funds make you money? ›

Mutual fund returns can come from several sources: Appreciation in the fund's NAV, which happens if the fund's investments increase in price while you own the fund. Income earned from dividends on stocks or interest on bonds. Capital gains or profits incurred when the fund sells investments that have increased in price.

How do funds get money? ›

Once a fund has accumulated investment dollars it earns money based on assets under management (AUM) as well as on fund performance. The more investment money a hedge fund can accumulate, and the better it performs, the more money it makes for itself.

Are funds a good investment? ›

While stock markets can of course go down as well as up, and returns are not guaranteed, holding funds that invest in some of the world's biggest, well-established companies can provide you with income, as well as some element of security.

How much money do I need to invest in a fund? ›

Takeaway investing tips for beginners

Save up an emergency fund of 3 to 6 months' worth of living costs before you invest. Be prepared not to touch your investment for at least 5 years. Don't assume you need to pick your own shares – ready-made portfolios are available.

How much should you invest in a fund? ›

“Ideally, you'll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that's fine.

Which type of fund is best? ›

List of Best Mutual Funds in India sorted by ET Money Ranking
  • Baroda BNP Paribas Balanced Advantage Fund. ...
  • UTI Equity Savings Fund. ...
  • ICICI Prudential Regular Savings Fund. ...
  • ICICI Prudential Credit Risk Fund. ...
  • ICICI Prudential All Seasons Bond Fund. ...
  • ICICI Prudential Medium Term Bond Fund.

What is a fund example? ›

A fund is cash saved or collected for a specified purpose, often professionally managed with the goal of growing the value of the fund over time. In investing, the most common example is a mutual fund, which pools money from shareholders to invest in a portfolio of assets such as stocks and bonds.

What is the difference between finance and fund? ›

Financing and Funding

When it comes to infrastructure investment, these are two separate concepts. Financing is defined as the act of obtaining or furnishing money or capital for a purchase or enterprise. Funding is defined as money provided, especially by an organization or government, for a particular purpose.

Who owns a fund? ›

The shareholders or unitholders who own (or have rights to) the assets and associated income.

What is the most popular investment fund? ›

Most Popular
  • #1. BNY Mellon Corporate Bond Fund BYMMX.
  • #2. Miller Intermediate Bond Fund MIFIX.
  • #3. Calvert Income Fund CFICX.

How do mutual funds work? ›

Mutual funds let you pool your money with other investors to "mutually" buy stocks, bonds, and other investments. They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them.

What is a fund in simple terms? ›

A fund is a pool of money set aside for a specific purpose. The pool of money in a fund is often invested and professionally managed in order to generate returns for its investors. Some common types of funds include pension funds, insurance funds, foundations, and endowments.

What are the pros and cons of a fund? ›

Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

Why would you keep money in a fund? ›

(1) Short-term goals. Money market funds are useful for short-term goals, such as saving for a vacation, a wedding, or a down payment for a house. In these cases, it may be more important that your savings hold their value over the shorter time period. (2) Maintaining an emergency reserve.

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