30 Mar What are investment funds?
If risk is not your thing, if you are a very prudent person when investing your money and you prefer to minimize the risks of your investments, today we will explain what are investment funds, what are the most common types and how to invest wisely and earn passive income.
What are investment funds?
When we talk about investment funds, we mean a set of capital in which several individual investors contribute. It is a form of investment that is used to invest collectively in shares and bonds of popular investment funds such as Morgan Stanley US Growth, JPMorgan Investment Funds, USAA Capital Growth Fund, Polaris Global Value Fund ecc.
In short, in investment funds an investor meets with many other investors, sharing the risk among a greater number of actors.
How do investment funds work?
Investment funds are based on diversification, in other words, they function like a portfolio of securities chosen for their growth prospects. This portfolio includes shares, bonds and other types of financial products of several companies. So, when you invest in an investment fund, you’re investing in several companies at the same time.
These funds work on the basis of co-ownership: when you invest in a fund, you acquire ownership that corresponds to a part of a basket of shares or bonds already selected and actively managed by experts.
Diversification ensures lower impact of equity yields because, where there is a negative or positive return, they have a limited influence on the overall result and are therefore a very prudent type of investment.
This means investing in funds may be safer that buy individual values, especially if you are a beginner.
It is important that you know that when investing in an investment fund, like any investor, you own your individual shares, but you have no influence on where the money from the funds is invested. It is the investment manager who decides which assets to buy or sell, how much and when.
This does not mean that the investment manager does not tell you where your money is going and the funds you are going to invest in. In fact, the European Union requires for UCITS (investment funds regulated by the European Union) that a fund manager provide a key document for the inverter that is called KIID. In contrast, for funds that are not UCITS, a Key Investor Document is required (KID) according to the PRIIP regulation.
These documents describe the most important information, such as the composition of the fund, costs, historical returns and distribution percentages.
Types of investment funds
There are many different types of investment funds. Below we will show you some of the main ones, so that when you invest, you can compare and choose the best option that suits your needs and savings..
- Bond investment funds: Bond funds are those that invest most of their assets in fixed income assets (including investments such as government and corporate bonds, certificates of deposit and money market funds). Fixed income can offer you a steady flow of income with a lower risk than shares and is therefore particularly recommended for investors with a conservative profile, that are willing to obtain reduced returns in exchange for more tranquility and less risk. This is an investment approach focused on capital and income conservation.
- Equity funds: Equity funds invest most of the capital in shares, that is, in equity assets that they offer higher potential returns and higher risks. These funds tend to concentrate investment in various countries, regions and sectors in order to diversify or spread risk. It is for this reason that these types of funds are recommended for a given investor profile, since he take greater risks during the investment, as well as higher earnings.
- The mixed income funds are a combination of shares and bonds that reduce risk due to the diversification of product types.
- Guaranteed funds: These are the types of investment funds that have a specific defined profitability target. The fund statement shall set out the minimum percentage of the investment that will be received in a predetermined period of time and on a specific date.
Advantages and disadvantages of investing in an investment fund
If you have considered several times to invest in an investment fund, but you need to know what its benefits and risks are, below we will clarify all your doubts.
Benefits of investment funds
- When investing in an investment fund, rely on the administrator’s knowledge and experience of the professional fund which buys and sells shares, bonds, etc.;
- You can invest in a very diversified way with relatively little money. And as we have already said, greater diversification entails less risk;
- As a private investor, it is much more difficult access to certain markets and sectors while investment funds can give you access to multiple markets.
- Finally, if you had to buy a basket of shares by myself, you would spend much more on transaction costs that if you do it through an investment fund.
Disadvantages of investing in an investment fund
- Despite the experience of the fund manager and specialists, you can get a negative return. That is, when you invest there is always a risk margin.
- When choosing an investment fund it is important to pay attention to spending indices because they could reduce the overall return on investment. There are many investment funds that have no selling expenses. For this reason it is important that you choose one of these or, at worst, funds whose expenditure rate does not exceed 1.20%, as they would be considered at the limit of the highest costs.
- If as an investor you seek execution time faster, keep in mind that investment funds provide a weak implementation strategy in this regard.