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Understanding Investment Funds

Investment Fund

What is an Investment Fund?

An investment fund is a collective investment scheme, which employs a professionally-run strategy to mitigate risk through diversification. Investment funds pool together the funds or monies of a widespread pool of investors to subsequently redistribute the funds into a multi-tiered investment strategy.

The pooled assets delivered to the fund allow the manager and team of financial professionals to access investment opportunities that otherwise would not be permissible or made available to them. The pooled monies, which are used to purchase assets or investments, are then redistributed proportionately among investors if the fund earns a profit. Conversely, if the fund loses money, the investors will lose a portion of their investment.

In addition to the enhanced opportunities, investment funds employ a strategy to minimize exposure to a particular sector or industry. To mitigate such a risk, an investment fund will diversify their investments through varying their purchases of bonds, equities, fixed-income instruments, derivatives and options.

The majority of investment funds place regulations on their potential investors in the form of minimum investments. The structure of the investment fund, the strategy of the fund and the amount of capital the fund possess will determine the minimum investment.

Types of Investment Funds

Hedge Funds:A hedge fund is an aggressively managed investment fund that is typically open to a limited range of high net-worth investors who are required to pay a performance fee the fund’s investment professional team or investment manager.

A hedge fund is a term used to describe an investment partnership that is professionally run and managed by a licensed money manager. The fund may take the legal responsibility and structure of a limited liability company or a limited partnership so that if the hedge fund goes insolvent, the creditors attached to the fund cannot seek more money from the investors than what was originally put into the fund.

Mutual Funds: A mutual fund is a professionally managed collective investment strategy that pools money from multiple investors for the mass-purchase of investment securities. Mutual funds--which are typically comprised of stocks, short-term money market instruments, bonds, commodities, other mutual funds, and other securities—are popular investment options due to their enhanced strategy and their ability to diversify risk through wide-spread investment of multiple industries and sectors.

Exchange Traded Funds: A type of investment fund traded on a stock exchange similar to a stock. Exchange traded funds hold assets (bonds, stocks, or commodities) at approximately their net asset value of the underlying securities throughout the course of the trading day. The majority of exchange traded funds will track a major index, such as the S&P 500.

As a result, if the overall economy grows and experiences a rise in prices, the underlying exchange traded fund will proportionately rise. This type of investment fund is particularly attractive due its tax efficiency, relatively low cost, and stock-like features. An exchange traded fund is a type of investment fund that combines the valuation feature of a unit investment trust or a mutual fund, which can be either bought or sold at the end of every trading day for its net asset value.

NEXT: A Brief History of the Stock Market

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