An investment fund is a financial institution that withdraws funds from smaller investors in return for which it issues shares or certificates in the fund’s financial assets. The funds raised in this way are invested by investment funds, both on the domestic and foreign markets. For the investment to be efficient, it is taken care of by a professional manager, as well as a professional team.
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Investment funds are divided into four major categories – cash, bond, mixed, and equity funds. Differences in the structure of investments are also reflected in the riskiness of funds. Monetary funds are the least risky, followed by bonds and mixed, and equity funds are considered the riskiest.
Investment funds reduce investment risk for their investors through diversification. This achievement of the diversification effect is fully available to small shareholders as well, as in most cases they have a low lower investment threshold. So that the investor, even with small funds invested in the investment fund, gets the risk diversification inherent in large investment amounts invested in a large number of different securities. The investor received the service of competent management of his funds relatively cheaply, as well as minimizing the accompanying costs of bookkeeping, keeping securities, transaction costs, etc. At the same time, the returns of investment funds can be far higher than the returns from term savings. If we add to that the possibilities of various payments and programmed savings and payouts offered by some investment funds, it is clear that the dynamic growth of the popularity of these funds is not accidental. You can find out more about investing if you click here.
Types of investment funds
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We can classify investment funds in two ways – by the way of investing and based on whether shareholders pay a commission or not.
If we talk about how to invest about them, we will say that the main division is into open and closed. Open-end funds almost always represent additional “shares”, ie investment units to interested investors and to buy the same “shares” from them – investment units at their request. Closed-end funds operate like all joint-stock companies, ie they issue a fixed number of shares and do not buy their shares from investors.
The second division of funds is encumbered and unencumbered. The encumbered fund is characterized by the fact that investors pay a commission when buying or selling shares, which covers the costs of selling and giving investment advice. If the sale is not made through an intermediary but directly, the costs of the sale are borne by the fund. Then it is an unencumbered fund.
According to investment objectives, funds can be divided into those that enter stocks, bonds, and funds that enter money market instruments. Shares can also be divided into several groups depending on whether the investment goal is to invest in fast-growing and capital gaining companies, or to invest in small companies that are expected to grow, and thus net at a high rate.
What Are the Different Types of Mutual Funds?
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Mutual funds are one of the most popular, and they have several subcategories so that each person will be able to find the right one for themselves. However, they have one thing in common – each of these tries to reduce the risk as much as possible, while increasing income. There are four broad types of mutual funds: Equity (stocks), fixed-income (bonds), money market funds (short-term debt), or both stocks and bonds (balanced or hybrid funds).
We believe that every person will find the right type of the fund to invest in. Equity funds have greater potential for growth but greater potential variability in value. Bond funds are very popular because they enter government-corporate debt. They are also considered safer than stocks because they have less growth potential. When investing in this type, investors are reimbursed a fixed amount on the initial investment.
Potential risks
The risks that most affect the returns of investment funds are usually the following: interest rate risk, risk of changes in the value of securities, exchange rate, and currency risk, risk of changes in tax regulations, and the like. Risks are most often divided into those that an investment fund management company can influence and those that it cannot. The first group of risks is usually eliminated by quality diversification of the fund’s portfolio. Portfolio risk is measured by the so-called. beta portfolio ratio, which shows the sensitivity of the portfolio to changes in the entire securities market. When the beta coefficient is less than 1, it means that its return is less sensitive than the return of the total market and thus less risky.
Foreign investment funds and surroundings
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Investment funds are very present in the developed economies of the world, where they are an integral part of financial markets. Some of the general characteristics of the funds are a higher rate of return than the return on savings in the bank, strong control of the fund’s operations by state institutions without guarantees to investors, publicity of the portfolio and operations, etc.
The average rate of return on investment funds in developed countries is 8-15% per year. Higher returns are noticeable at the beginning of the work of investment funds, which later decrease slightly.
It should also be pointed out that even in the most developed countries, investment funds sometimes had losses, and even went completely bankrupt.
Advantages of investment in the investment fund
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The great advantage of an investment fund is the fact that you are relieved of obligations such as constant monitoring of market movements, as well as being an experienced investor. In this case, the funds are managed by an authorized portfolio manager, whose work reduces the risk of investing in the investment fund. The reason for that is portfolio diversification.
There are many benefits to investing in an investment fund, and another one is the ability to sell an investment unit whenever you want. By selling you get liquid assets. The income that can be generated by investing in an investment fund can bring far better earnings than saving in a bank.
