You’ve probably heard someone say it before but what are investment funds, really? An Investment fund is a vehicle in which multiple investors can aggregate their money towards a particular strategy. In other words, it’s a supply of capital that belongs to numerous investors where each person has control and ownership of their own shares. Mutual funds, money market, and exchange funds are examples of investment funds.
Understanding Investment Funds
This type of investment can be split into two categories: public and private. A public fund is open to the masses, while many private funds have a limited number of investors and are only offered to sophisticated or institutional investors.
The largest advantage a public fund has over a private one is the ability to tap the open market. This ability to raise money or trade in the open market comes with added oversight, regulation, and reporting requirements. Included in these requirements are rules meant to limit risk and increase transparency.
Can Individual Investors Make Decisions?
Individual investors cannot make decisions on investment funds such as deciding on how assets are invested. You simply pick a fund based on your risk tolerance, goals, the fund’s historical performance, and other applicable factors. A fund manager makes all the decisions and oversees the fund for all the collective investors.
Common Types of Funds
Open-end vs. Closed-end. Most investment funds operate as open-ended mutual funds. New shares are issued as more money is added to the pool by investors and shares are removed as investors pull out.
Closed-end funds. They trade like stocks on an exchange and are managed funds with fixed shares. These funds trade based on the supply and demand ratio of investors.
ETFs (Exchange-traded funds). They are good alternatives to mutual funds if you want more flexibility with your investment fund. Like closed-end funds, they trade on exchanges and can have lower expense ratios compared to mutual funds.
Hedge Funds. These are not regulated by the SEC (Securities and Exchange Commission) and are private funds. You’ll need to be a sophisticated investor to invest in these funds. Hedge funds are more actively managed so there’s usually a larger management fee involved.