One of the alternatives for forming one's own portfolio are investment funds , which can also be part of an investor's portfolio. In this article, we will tell you what an investment fund is , what types of funds there are, and what are their differences.
What is an investment fund
An investment fund is a fund in which investors invest money. It is managed by a professional manager in accordance with the fund's prospectus. The prospectus is a description of the fund's strategy, limiting the powers of investors and the manager. In essence, this is a contract concluded between the manager and the investor who invests capital in the fund.
How the investment fund works
The investment fund allows you to collect investors' money in one place so that a professional manager can implement a pre-defined strategy. Accordingly, instead of keeping 100 different accounts, investors buy shares of a similar fund as an "asset management" service. That is, they fall into the general pit strategy, which is a little less flexible, but cheaper and easier.
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Types of investment funds
Investment funds are different. For example, the following types of investment funds are distinguished:
- mutual fund;
- hedge fund;
- index funds, for example, ETF (Exchange Traded Fund).
Let's consider them in more detail.
Mutual fund
A mutual fund is often the most common fund available to an investor. From the point of view of assets, it can be different — a bond fund, a stock fund, a derivative fund, or all together in a pre-agreed proportion.
Usually, mutual funds are easily accessible, and depending on the regulatory regime, both the jurisdiction and the strategy of the fund may be available to unqualified investors. But at the same time, it is important to pay attention to the fact that different funds can have different minimum contribution amounts. For example, the amounts can be both in the form of the price per share of the fund, and in the form of a directly prescribed limitation.
Hedge fund
A hedge fund is a more complicated case. The essence of a hedge fund is to maintain profitability regardless of market conditions. Because of this, hedge funds are less regulated and can use the purchase/sale of exotic financial and non-financial assets as a strategy. Easy regulation is one of the main features of a hedge fund.
In hedge funds, you will usually encounter a complex legal structure and the restriction that only qualified investors can invest in the fund. This is explained by the fact that due to the very easy regulation, the risk profile of such funds rises sharply, and you are left with insurance in the form of regulatory control.
Index funds
Index funds are the simplest and cheapest method of investing. Instead of having a manager, an index fund simply simulates a portfolio that counts the index.
An index is an indicator of the financial market, which includes a certain amount of financial assets in a certain proportion. Previously, they were used for macro analytics to understand the general trend of the financial market. Now they can be used as an investment portfolio.
Known indices are:
- S&P 500 — 500 largest American companies listed on American stock exchanges;
- DOW JONES 30 — is an index of the 30 largest industrial companies in America;
- Nikkei 225 — is an index of 225 largest Japanese companies listed on the Japanese stock exchange.
ETFs
ETF (Exchange Traded Fund) is an exchange-traded fund. This is a subtype of investment fund. In fact, any of the types described above can be hidden under such a fund, but mostly these are index funds.
The main advantage of such funds is very easy access. In classic funds, the investor must submit an application for admission, there are restrictions on withdrawing money from the fund. Some funds limit the withdrawal of funds to a certain period of the year, have a minimum withdrawal amount, and have a complicated entry and exit procedure. ETF does not have such restrictions, because entering/exiting such a fund is buying/selling shares of this fund on the stock exchange.
Read also: Investment portfolio: types, principles of formation
How to choose an investment fund: tips for an investor
Choose a fund based on your investment goals. In any case, a potential investor should familiarize himself with the prospectus of the fund so that there are no unpleasant surprises, and in the event of something, contact the interested fund and find out the details.
Remember that in this case your contact person from the fund is interested. Nothing critical, but it is important to understand this.
In fact, fund selection is a simpler investment method than portfolio collection, taking less time both at the stage of researching available proposals and at the stage of investment. Unlike a portfolio, the fund does not require rebalancing, recalculation and review of the strategy.
Read also: How to start investing in Ukraine in 2023
Frequently asked questions: what is an investment fund
What do investment funds earn
Investment funds usually earn a management fee — a management fee that is expressed as a percentage. Funds can also earn a performance fee — a fee for the fund's high profitability. Usually, performance fee is calculated as the difference between the actual return of the fund and the average return of the market for that period. Part of the difference in these revenues is transferred to the manager as a bonus for good work.
Who controls investment funds
Depending on the structure of the fund, the investment fund can be fully managed by the manager (you just buy shares) and investors (the manager cannot do anything without the permission of the investor). These relationships are regulated at the level of the fund's prospectus.
