What Is an Investment Fund
An investment fund is a supply of capital belonging to numerous investors, used to collectively purchase securities, while each investor retains ownership and control of their own shares. 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.
Breaking Down Investment Fund
With investment funds, individual investors do not make decisions about how a fund's assets should be invested. They simply choose a fund based on its goals, risks, fees and other factors. A fund manager oversees the fund and decides which securities it should hold, in what quantities, and when the securities should be bought and sold. An investment fund can be broad-based, such as an index fund that tracks the , or it can be tightly focused, such as an ETF that invests only in small technology stocks.
While investment funds in various forms have been around for many years, the Massachusetts Investors Trust Fund is generally considered the first open-end mutual fund in the industry. The fund, investing in a mix of large-cap stocks, was launched in 1924.
Open-End vs. Closed-End
The majority of investment fund assets belong to open-end mutual funds. These funds issue new shares as investors add money to the pool and retire shares as investors redeem. These funds are typically priced just once at the end of the trading day.
Closed-end funds trade more similarly to stocks than open-end funds. Closed-end funds are managed investment funds that issue a fixed number of shares and trade on an exchange. While a net asset value (NAV) for the fund is calculated, the fund trades based on investor supply and demand. Therefore, a closed-end fund may trade at a premium or a discount to its NAV.
Emergence of ETFs
ETFs emerged as an alternative to mutual funds for traders who wanted more flexibility with their investment funds. Similar to closed-end funds, ETFs trade on exchanges and are priced and available for trading throughout the business day. Many mutual funds, such as the Vanguard 500 Index Fund, have ETF counterparts. The Vanguard S&P 500 ETF is essentially the same fund but came to be bought and sold intraday. ETFs frequently have the additional advantage of slightly lower expense ratios than their mutual fund equals.
The first ETF, the SPDR S&P 500 ETF, debuted in the United States in 1993. By the end of 2018, ETFs had roughly $3.4trillion in assets under management.
Investment Funds: Hedge Funds
A hedge fund is an investment type that is distinct from mutual funds or ETFs. This fund is an actively managed fund made available to accredited investors. A hedge fund faces less federal regulation and is therefore able to invest in a variety of asset classes using a wide range of strategies. For example, a hedge fund might pair stocks it wants to short (bet will decrease) with stocks it expects to go up in order to decrease the potential for loss.
Hedge funds also tend to invest in riskier assets in addition to stocks, bonds, ETFs, commodities, and alternative assets. These include derivatives such as futures and options that may also be purchased with leverage, or borrowed money.
Are UK and US Investment Funds Similar?
Yes, U.K. investment funds are quite similar to American mutual funds, allowing investors to invest in a single fund to buy shares in a diverse portfolio of securities.
Do Investment Funds Charge Fees?
Yes, investment funds can charge fees, including ongoing management costs, transaction fees, and other one-off costs.
How Can You Choose the Right Investment Fund?
To choose the right investment fund, you must consider your investing goals and risk tolerance. Examine funds that invest in assets that match your tolerance for risk and look for management that has a strong track record. Also, try to keep fees low.
The Bottom Line
An investment fund is a pool of capital from many investors that can purchase a wide variety of securities. By investing in one, you can easily build a diversified portfolio at a relatively low cost. Before investing, consider a fund's management style and fees.
