What Is an Investment Fund
Let me explain what an investment fund is: it's a supply of capital that belongs to numerous investors, and we use it collectively to purchase securities, while each investor keeps ownership and control of their own shares. As an investor, you'll find that an investment fund gives you a broader selection of opportunities, greater management expertise, and lower fees than you might get on your own. The types you should know about include mutual funds, exchange-traded funds (ETFs), money market funds, and hedge funds.
Breaking Down Investment Fund
When you invest in these funds, you don't make the decisions about how the assets are invested. You simply pick a fund based on its goals, risks, fees, and other factors. A fund manager oversees everything and decides which securities to hold, in what quantities, and when to buy or sell them. Funds can be broad, like an index fund tracking the S&P 500, or focused, such as an ETF investing only in small technology stocks.
Investment funds have been around for many years, but the Massachusetts Investors Trust Fund is generally seen as the first open-end mutual fund, launched in 1924 and investing in large-cap stocks.
Open-End vs. Closed-End
Most investment fund assets are in open-end mutual funds. These issue new shares as you and other investors add money, and they retire shares when you redeem. They're priced once at the end of the trading day.
Closed-end funds, on the other hand, trade more like stocks. They're managed funds that issue a fixed number of shares and trade on exchanges. We calculate a net asset value (NAV) for them, but they trade based on supply and demand, so they might go at a premium or discount to NAV.
Emergence of ETFs
ETFs came about as an alternative to mutual funds for those wanting more flexibility. Like closed-end funds, they trade on exchanges and are priced throughout the business day. Many mutual funds have ETF versions; for example, the Vanguard 500 Index Fund has the Vanguard S&P 500 ETF, which is essentially the same but tradable intraday. ETFs often have lower expense ratios too.
The first ETF, the SPDR S&P 500 ETF, started in the US in 1993. By the end of 2024, ETFs had $10 trillion in assets under management.
Investment Funds: Hedge Funds
A hedge fund is different from mutual funds or ETFs—it's an actively managed fund for accredited investors. It faces less regulation, so it can invest in various asset classes with wide strategies. For instance, it might pair stocks to short with those expected to rise to reduce loss potential.
Hedge funds invest in riskier assets beyond stocks and bonds, including commodities, alternatives, and derivatives like futures and options, often using leverage or borrowed money.
Are UK and US Investment Funds Similar?
Yes, UK investment funds are quite similar to US mutual funds. They let you invest in a single fund to buy shares in a diverse portfolio of securities.
Do Investment Funds Charge Fees?
Yes, they do charge fees, including ongoing management costs, transaction fees, and other one-off costs.
How Can You Choose the Right Investment Fund?
To pick the right one, consider your investing goals and risk tolerance. Look at funds that invest in assets matching your risk level and check for management with a strong track record. Also, aim to keep fees low.
The Bottom Line
An investment fund is a pool of capital from many investors that can buy a wide variety of securities. By investing in one, you can build a diversified portfolio at a relatively low cost. Before you invest, think about the fund's management style and fees.
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