You have definitely heard of the term “investment fund”, but do you know what it means? Read ahead for a straightforward explanation!
What Is An Investment Fund?
An investment fund is a pool of capital contributed by multiple investors, which is used as a means of collectively purchasing securities. While each investor retains ownership and control of their own shares, the investment fund is run by professional managers who make strategic decisions on behalf of the clients.
What You Need To Know About Investment Funds
Investment funds can be structured in two ways:
- Open-end funds are open to investment at all times as long as there is demand for the shares they offer.
- Closed-end funds typically do not offer their shares for sale on a continuous basis. Instead, they issue a fixed number of shares all at once. Once such a fund conducts its initial public offering, investors can buy or sell the shares on a stock exchange.
Generally speaking, the majority of investment fund assets belong to open-end mutual funds. However, there are other types of organizations that fall under the investment fund definition, including:
- Exchange-traded funds (ETFs) are similar to mutual funds but trade on an exchange like stocks rather than directly.
- Hedge funds are private investment funds that use advanced strategies to generate high returns for their investors.
- Real estate investment trusts (REITs) invest in a portfolio of real estate assets, such as commercial and residential properties.
- Private equity funds focus on companies whose shares are not publicly traded.
- Money market funds invest in short-term securities that entail low risk levels, such as government bonds and certificates of deposit.
- Target-date funds are designed to provide a diversified portfolio that automatically adjusts its asset allocation based on the investor’s target retirement date.
Each type of investment fund has unique characteristics and strategies to match different investment objectives and risk tolerances.
