What Exactly Is an Investment Fund?
Investment funds are a pool of funds from multiple investors that is used to buy securities collectively while each investor retains ownership and control of his or her shares. An investment fund offers a bigger range of investment choices, more management skills, and lower investment fees than individual investors could acquire. Mutual funds, exchange-traded funds, money market funds, and hedge funds are all examples of investment funds.
BREAKDOWN OF AN INVESTMENT FUND
Individual investors do not make judgments about how a fund’s assets should be allocated when they invest in investment funds. They just select a fund based on its objectives, risk, fees, and other considerations. A fund manager oversees the fund and selects which securities to hold, in what quantities, and when to buy and sell them. An investment fund might be broad-based, like an index fund that tracks the S&P 500, or narrowly specialized, like an ETF that exclusively invests in small technology businesses.
While investment funds in various forms have been available for many years, the Massachusetts Investors Trust Fund is widely regarded as the industry’s first open-end mutual fund. The fund, which invests in a variety of large-cap stocks, was established in 1924.
Closed-end vs. open-end
Open-end mutual funds hold the vast bulk of investment fund assets. As money is added to the pool, these funds issue new shares, and as money is withdrawn, shares are retired. Typically, these funds are valued only once at the conclusion of the trading day.
Open-end funds trade more like stocks than closed-end funds. Closed-end funds are managed investment funds that sell a set amount of shares on an exchange. While the fund’s net asset value (NAV) is computed, the fund trades based on investor supply and demand. As a result, a closed-end fund may trade at a premium or a discount to its net asset value (NAV).
ETFs are becoming more popular
For traders who sought more freedom with their investment funds, exchange-traded funds (ETFs) arose as an alternative to mutual funds. ETFs, like closed-end funds, trade on exchanges and are priced and traded throughout the business day. Many mutual funds have ETF counterparts, such as the Vanguard 500 Index Fund. The Vanguard S&P 500 ETF is virtually the same fund, but it can now be purchased and sold on an intraday basis. ETFs usually have slightly lower expense ratios than their mutual fund counterparts.
The SPDR S&P 500 ETF was the first ETF to be introduced in the United States in 1993. By the end of 2018, ETFs managed around $3.4 trillion in assets.
Investment Funds: Hedge Funds
A hedge fund is a sort of investment that is separate from mutual funds or exchange-traded funds (ETFs). This is an actively managed fund open to authorized investors. Because hedge funds are subject to less federal oversight, they can invest in a wide range of asset classes and employ a wide range of methods. For example, a hedge fund might combine stocks it wants to short (bet will fall) with stocks it expects to rise to reduce the risk of loss.
In addition to stocks, bonds, ETFs, commodities, and other assets, hedge funds frequently invest in risky assets. Derivatives such as futures and options can also be purchased with leverage or borrowed funds.