What Is An Investment Fund?
An investment fund refers to a financial vehicle that uses the collective funds of a group of individuals, companies, or other investment funds to invest in financial instruments. These instruments include securities, stocks, infrastructure assets, and bonds.
Investment funds are a helpful financial instrument to ensure that people can access investment opportunities and markets that would have been otherwise impossible to get on their own.
As an added advantage, the group of individuals no longer need to worry about keeping track of their now expansive portfolio since the investment fund all but guarantees a manager will see to the "collective" investments.
How Does An Investment Fund Work?
First of all, for the investment fund to exist, you must have these three things::
- Individual investors in need of a way to invest in multiple ventures
- A managing firm experienced in handling such financial vehicles
- An investment thesis that the managing firms commit to respect in deploying the capital
The managing firm, through their professional investment managers, will pool together the funds of the many investors and then select what assets to purchase. The decision on which assets, investments, or securities to buy does not rest in the hands of the investors — a manager handles this in line with the investment thesis communicated to the investors.
These firms and their managers have experience with managing investment funds and, as such, know best when and on what to invest. By extension, this translates to reduced risk and a much more robust portfolio. One that the investors would have been unable to get or manage on their own.
The investment manager's role is to research and analyze the market and potential investment opportunities in order to maximize profits. Here's where the investors come in once again — since they own shares by virtue of the collective fund, the gain is theirs, depending on the content of the portfolio.
The managing firm will present the investors with an invoice for services rendered. The invoice will cover any fees or expenses incurred during the duration of the fiscal window. Following this, if there are any profits, they will be distributed and shared out.
Investment Funds Management Types
Investment funds exist in different shapes and sizes, and each one is designed with its unique objectives and industry. They can be split into two umbrella categories.
Public Investment Funds
Public investment funds (or public-traded funds) as the name suggests, are traded on the open market and the many stock exchanges. By virtue of this, the funds are used to purchase stocks in publicly owned firms as opposed to private firms.
Private Investment Funds
Private investment funds involve purchasing assets in privately owned businesses.
Strategies of Public Investment Funds
Mutual Funds
These are kinds of investment vehicles that set up a collective fund from the money of many investors. The funds pooled together are then used to create a diverse portfolio of assets, bonds, and other forms of securities.
The portfolio is, in turn, managed by seasoned professionals who will diversify the funds in order to minimize risk and maximize profit. They are meant for a "once a day" trading structure. Investors of this kind of fund will get returns in capital gains and dividends.
Exchange-Traded Funds (ETFs)
ETFs and mutual funds share a similarity, which is that they both pool money from many investors, but that's where their similarity ends. ETFs are passively managed funds, whose objective is to stay as close as possible to an index of securities.
This means that they can be traded at any given time, as long as it's a trading day. ETFs are efficient types of investment funds that offer diversification and cost less than mutual funds.
Hedge Funds
Most hedge funds invest solely in publicly traded companies, though from the investor side, they are private. e. They are also actively managed investment vehicles that often utilize unusual and sometimes aggressive tactics to get much higher profits. Types of hedge funds include equity, relative, global macro, and activist hedge funds.
Strategies of Private Investment Funds
Private Equity Funds
A private equity fund is a pool of investment that goes toward purchasing various equity securities according to a particular investment strategy. The equity being purchased is not available to the general public.
Venture Capital Funds
Venture capital funds go toward financing innovation and represent a collective investment in startups or small, growing businesses that are deemed to have the potential for long-term growth.
How Funds Raise and Distribute Money
Investment funds, whatever the investment strategy, are split into two: open-ended and closed-ended.
Open-Ended Investment Funds
In this type, the shares in the collective fund are not under any constraints. Rather, the funds can issue and even redeem shares for any of the investors if they demand it.
Closed-Ended Investment Funds
These, in contrast to open-ended investment funds can only issue shares during a fixed period of time. And some of these shares can only be traded in the open market.
Pros and Cons of Investment Funds
Key Takeaways
Investing can seem daunting if you are not up-to-date with market trends. Without the right amount of knowledge and guidance, an investor can make costly mistakes in their investment journey. Here's where an investment fund comes in: to alleviate individuals or a group of individuals from the hassle of having to do the dirty work themselves.
Are you looking for investment solutions? Head on over to Roundtable and avail yourself of our wealth of knowledge in real estate, venture capital, and private equity.
References
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