Investment funds are used for the investment of money for profit. An investment fund is a financial investment vehicle, which is aimed at private investors – little or large-or institutional investors-insurance companies, banks – and offers the following five key advantages over direct investment in shares, bonds and property:
1. Risk is spread and hence reduced.
2. Funds allow you to tap into professional, expert and full time investment management expertise.
3. Funds are cost effective.
4. Funds offer access to markets that may otherwise be closed or too technical for retail/individual investors.
5. Funds benefit from institutional safety, which means they are heavily regulated and supervised.
The benefits of investment funds, where individuals from all walks of life pool their savings together, can be summed up as offering everybody – from professional or institutional investors to people with limited time, or limited investment skills or modest means – access to investment returns otherwise only available to more sophisticated investors, who are able to buy their own professional portfolio management advice.
Investment funds generally entail less risk than direct holdings of securities, and offer economies of scale. It is a firm that invests the pooled funds of retail investors for a fee.Information on the product you, as an investor, are contemplating buying is crucial.
Usually, all vital information must be included in an investment fund’s prospectus. However, prospectuses have become increasingly complex and difficult to understand, thus discouraging investors from reading them.
Investment funds are suitable for anyone who:
1. Is planning to invest in the capital markets but does not want the risks or costs associated with direct investment in equities or bonds.
2. Already has enough money to cover their everyday spending needs and has some spare cash.
3. Can accept possible temporary falls in the value of their investment.
Investment funds should be considered as a long-term savings product. Investments should be held for at least three to five years, preferably longer. In fact, the longer the time scale, the greater the potential to make money grow.
Investment funds can be classified according to their investment objectives.
1. Money Market Funds
Money market funds invest a sizeable portion of the fund’s portfolio in short-term bonds and/or money market instruments (such as certificates of deposit, commercial paper, treasury bills,).
2. Bond Funds
Bond funds invest in fixed interest rate securities as a sizeable portion of the fund’s portfolio. These funds generally have a global average maturity of more than one year and its investments can consist of different instruments with very different quality ratings.
3. Equity Funds
Equity funds invest in the stock market at a significant portion of the fund’s portfolio. These funds are frequently also called stock funds.
4. Balanced Funds
Balanced funds spread their portfolio over the three main classes described above.
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