Last Updated on:

March 27, 2021

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One of the best ways to create wealth in the long run is to invest in investment funds. Investing in investment funds is a good way to diversify risks and create a portfolio that will give you higher returns than other conventional investment options.

An investment fund is a group of money managers working together to make profits for many investors. Instead of doing your own research, an investment fund pools together funds. 

This pool of money will invest in different asset classes (stocks, bonds, commodities, currencies). It's not uncommon to see an investment fund outperform the market.

There is no need to actively manage the portfolio. Investment fund managers do all the work — you just need to choose the fund you want to invest in.

Each investment fund, or group of investments, has clear goals and objectives to accomplish. Examples of such goals and objectives include fixed-income securities (such as U.S Treasury bonds), long-term (higher quality) growth investments, income investments (such as dividend payers), and balanced funds (investing in both longer term and shorter-term investments).

What are Investment Funds?

When you invest in funds, you will invest in a basket of investments which are selected by the fund managers.

You’ll pay fees for services including share trading and asset management. Most investment funds charge fees based on a percentage of your investment amount. 

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There are also taxable products available, but they may not have as much tax benefits as other options.

If you are planning to use an investment fund, be sure to read the terms before moving forward.

  • Fixed income funds - focus on interest return, such as rental income, interest from debt securities, etc. Treasury bills, federal bonds, municipal securities, corporate notes, debt securities.
  • Long term growth funds - are usually equity investments with the intention of generating the highest returns on capital gains. 
  • Growth and income funds - aim to invest in blue-chip stocks that offer dividends. When the economy is down, investors will appreciate the opportunity for capital gain, as well as the ability to earn dividends — often through stock repurchases.
  • Bond and equity funds- are combined to ensure a well-balanced return. A bond fund can strive to maintain a balanced portfolio of 60% equity and 40% bonds. To keep a steady profit and balance risk, bond funds can seek to hold 40% of their portfolio in high-yield bonds and 60% in higher interest-bearing investments.

Investment funds can allow you to enjoy lower fees than you would on invest by your own, and they can also bring in a solid manager who has years of experience.

Then there's also the greater peace of mind — funds are managed by professionals, with minimal maintenance fees that don't matter to you.

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Types of Investment Funds

Mutual Funds

Mutual funds collect investments from individual investors and then invest them in a variety of different securities, like stocks, bonds or other investment vehicles.

Mutual funds are not chosen by an investor but instead they are set up and managed by investment management firms, such as Fidelity Investments , Schwab , Vanguard or T. Rowe Price .

Exchange-Traded Funds

Exchange-traded funds (ETFs) offer a different type of investing opportunity for people who want access to a broad selection of stocks.

ETFs manage portfolios of a core asset backed by a basket of other equities and financial instruments. A core index (e.g., the S&P 500) is used to track a particular market segment, while ETFs compare performance with that index.

Hedge Funds

Hedge funds are investment tools tailored to specific needs. These multi-billion dollar firms often will invest in high-risk strategies which can vary greatly depending on the needs of individual investors.

High-risk strategies available for hedge funds include short selling, derivatives, and leveraged investments. They are a great way to build a diverse portfolio, but caution should be exercised when investing in hedge funds.

What are the 4 types of Investments?

You should understand the risks when talking about investment vehicle. When it comes to finance, various types of investment vehicles come with different risks.

In the short term, the risk of losing any or all of your initial investment (your capital).

Risk in investing commonly comes from the volatility of stock and bond prices, inflation, interest rates, taxes, and more. Understanding what factors are affecting the value of your investment comes with experience.

Risk of each type of investment

Investment type

Objective

Maximum Loss

Savings

Security and interest payment

Secured

Fixed Interest Bond

Rising Bond Market, Fixed interest payment

Initial Investment

Unit Trusts

Rising Investment Prices, Income from dividends

Initial Investment

Exchange Trade Funds ( ETFs)

Rising Index or Sector Prices

Initial Investment

Rising Share Price or Dividends

Initial Investment

Company Warrant

Rising or Falling Price of the underlying investment

Initial Investment

Contracts for Difference(CFD)

Rising or Falling Price of the underlying financial investment

Unlimited

Saving is the most important aspect of your finances. The best asset is money you have in a bank account. 

Savings

Savings is the best asset. You never lose it and banks make you earn interest. The average savings account APY in the US is 1% — but to find out the best one, all you have to do is visit the bank branch nearest you.

Bonds

Bonds are a type of debt raised by the government or corporations to collect money. 

  • Bonds raised by the government are called U.S. bonds 
  • Corporate bonds are U.S. corporate bonds  

You're authorizing the bond issuer to borrow your money and pay you back with interest when you buy a bond.

Bonds are usually very stable financial vehicles, as, during an economic crisis, the government may print money to collect funds. On the other hand, as corporations declare bankruptcy, bonds holders have the priority to be paid back first.

Mutual Funds

Mutual funds are portfolios of stocks typically selected by money management firms trained in the investment industry due to their growth potential.

They allow investors, in a single transaction, to buy a large number of investments.

This is a useful concept – mutual funds can be described as portfolios of investments within a specific category.

Fixed-asset mutual funds are "portfolios" that own a fixed number of assets, e.g., stocks or bonds. Some mutual funds also invest in other assets - often referred to as "alternatives." The "fixed approach" refers to the ways that the mutual fund invests in each asset type.

Exchange-traded funds

ETFs are actively managed funds that track and purchase an index (such as the S&P 500) or a basket of assets, such as a commodity index. ETFs trade like a stock on the stock market. They sit between stocks and mutual funds.

ETFs are traded like a regular share of stock on the stock market.

Your money would be spread out over 500 stocks if you buy an S&P 500 ETF, and the particular risk factors of no individual company will have a huge effect on your investment results.

Stock Market

A stock is a stake in a company. When you purchase a stock, you buy a share of the company's earnings and assets, which may include factories, stores, employees, patents, customers, brands, and technology.

Depending on the industry, markets may fluctuate 10% every year or more. The stock market is not very risky if you are investing for long periods of time.

Are investment funds a good options to start investing?

The stock market is a great way to start investing but it is dominated by expensive fund managers and complicated terminology. These are the reasons why many people start out with investment funds.

There are three main benefits of your investment funds. They are cost-efficient, tax-advantaged, and hassle-free.

Investment-funds

To make the most out of these benefits, you need to use an investment plan that suits both you and your personality.

1.Low entry and no minimum investment

The minimum amount to start is normally very low. You can start by poring $100 every month on time. If you are serious about increasing your funds considerably, set it up an automatic monthly payment.

2. Diversify and minimize risk

One or two mutual funds can be invested in the diversification of your investment portfolio. It depends on how relaxed you are with your money.

Let's say that consecutively about your money, Fixed income funds have been a go-to investment for investors looking for safety and certainty. They're also a good choice if you're looking to save pennies over the long term, and you don't mind debt.

Funds with long-term growth goals can be a good option for ambitious investors. Since funds are invested in equities for the highest returns with the goal of capital gain.

Funds with long-term growth goals are a great tool for ambitious investors. Whether funds are 80% or 90% invested in equities, they will deliver returns.

Many investors with long-term investment goals look for bonds to build balance and some caution, while maintaining the best return possible.

Of course, investors should not put all their eggs in one basket. A balanced portfolio of 60% and 40% also helps for cautious investors looking for growth and safety.

3.Better returns than stock picking

You should make the effort to study the financial statements of a company and estimate the financial ratios. Then using the financial ratios to find the best business to invest in the same market, a comparative analysis is conducted.

Stock picking is an ability that takes a lot of experience to select the correct stocks.

When investing in investment funds, you benefit from making investment decisions because you employ a fund manager to pick up stocks for you.

For most individuals, therefore, selecting investment funds would be advantageous because they also offer some reasonable returns from their well-diversified portfolio.

How can I invest in an investment fund?

When it comes to time, you are planning to buy a house or pay for your children's college fees. You can opt to save money and invest in funds to get the maximum return.

You might receive unexpected high return with the best stocks and growth stocks.

Candid shot of serious Caucasian retired woman in spectacles calculating expenses, trying to save money for expensive purchase, paying domestic bills online using electronic gadget at kitchen table

If you're someone whose interest is saving for retirement and receive interest that's pegged at a 3% rate on a money market fund, it's one of the best investments available. 

Money market funds invest in short-term quality debt.

quotation mark afs

Ron Chernow

Mutual funds have historically offered safety and diversification. And they spare you the responsibility of picking individual stocks.

How do you make money from the 

Investment funds?

You can make money from mutual funds and exchange-traded funds (ETFs) in three ways: dividend distributions, capital gains, and share price changes (NAV).

  • Dividend payments - Depending on the purpose of the underlying funds, Mutual Funds and ETFs typically earn dividends or interest in the investment portfolio based on the stock or bond. 
  • Increase market price (NAV) - If after deduction of expenditures and liabilities, the net asset value of an ETF portfolio increases, then its value will increase and the share price will also increase. For mutual funds, this is known as "the market price" for a fund's shares, which are determined by the NAV.

About the author 

Income Junctions

Business Idea & Investing for Solopreneur Income Junctions helps you to find ways to make money online, get inspiration and advice to starting a business on your own, and investing tips for solopreneur.

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