Investment fund is one of the first and most important concepts that every new party interested in financial investments will need to learn about. In this article, you will find all the information you may need to get acquainted with what investment funds are in detail.
What is an investment fund?
An investment fund is a collective pool of money, funded by multiple investors to make investments in various financial schemes and instruments as one. They are sometimes defined as Collective Investment Schemes (CIS) for the same reason.
Money is pooled for making collective investment in a diverse range of assets such as securities, derivatives, stocks, bonds, etc. This is done to mitigate market risks by maximising on changing market conditions across multiple segments of the industry as a whole.
Is an investment fund the same as a mutual fund?
Investment funds can certainly be the same as mutual funds, given that the mutual fund is the first and the most common investment fund type. However, since there are other, different types of investment funds as well, it would be more appropriate to state that all mutual funds are indeed investment funds, but all investment funds are not necessarily mutual funds.
What are the different types of investment funds?
As explained, an investment fund is a unified pool of money that is collected for the very purpose of making diverse, multifaceted investments. Naturally, this allows for a lot of variations an investment plan. Some of the more important collective investment schemes that define separate types of investment funds are as follows:
- Closed-End Funds: IPOs that trade in stocks with a prefixed number of tradeable units.
- Open-End Funds: Invest in day trading with little to no limit on minimum or maximum tradeable units.
- Mutual Funds: Invest primarily in securities (index funds, money market funds, target date funds, etc.).
- Stock Funds: Invest primarily in stocks (shares).
- Bond Funds: Invest primarily in bonds but may also invest in other debt securities.
- Hedge Funds: Invest primarily in assets with moderate to high liquidity.
What are the advantages of investing through an investment fund?
There are several advantages, although there is some variability in that regard, depending on the kind of CIS chosen. Nonetheless, the following can be highlighted as the main reasons why investors prefer pooling their money in collective funds.
Expert Management – The money in an investment fund is usually invested, traded, and reinvested by investment fund managers, who are themselves experienced financial experts.
Financial Accessibility – What makes most investment funds so accessible is the fact that they generally do not come with a high limit for minimum investment amount. Investors are usually free to invest as much or as little as they would like to. They may also be free to invest more later if they choose to do so.
Beginner-Friendly – For new investors, the advantage, security, and ease of making investments into an investment fund is exceptional. No experience is required at all when the entire fund is already being managed by people with several years of professional, financial expertise.
It should also be noted that all financial investments are subject to market risks by default and no variant of the investment fund is an exception to that rule. Nevertheless, they do provide a comparatively safer option and most risks can be mitigated with smart investment portfolio management strategies.