There’s no shame in asking for help. Investing in a fund is an effective way to invest with the help of professional investors at top financial institutions.
Depending on your financial literacy, time available and amount of capital to invest - there are different ways to go about investing.
FlowBank believes in empowering people to make their own investments and construct a portfolio of assets that create wealth and financial independence. But it needn’t be all stock-picking!
From retirement plans to hedge funds, investing in funds offers investors the chance to pay for services that make their investing life easier.
For example, investing in mutual funds outsources some of the investment choices to a professional money manager, while index funds offer a way to easily add diversification to a portfolio.
This is our introduction to funds..
Contents: Funds investing
- Fund definition: What is a fund?
- Why invest in a fund?
- Different types of funds
- How does a fund work?
- Top funds companies by size
- What are the charges for funds?
Fund definition: What is a fund?
At the most basic level, a fund is cash saved or pooled together for a specified purpose. Think of a rainy day fund, community fund, birthday fund or college funds. The goal is to gather and keep all the necessary money in one place until it's needed.
Investing funds pool money from investors to invest in financial assets like stocks, bonds or property. While the purpose of a birthday fund is to pay for a birthday party and presents, the goal of an investing fund is to grow the value of the money invested in the fund and/or to provide an income.
Why invest in a fund?
Just as you might decide to go to the car garage instead of changing the oil in your car yourself, you can go to a professional investor instead of doing the investing all by yourself.
Fund managers will have years of investing experience and typically recieve high compensation and the management of their fund has a lot of expenses. For wealthy family offices it is worth it to pay these professional fees but it would be impossible to do for most individual investors.
Mutual funds were designed as a fund that is accessible to all with low minimum investments. The advantage of investing through a mutual fund is that it gives individual investors access to professionally-managed, diversified portfolios.
Types of investment funds
There are different fund types, mostly depending on what assets are invested in and how that investing is done.
1) Mutual funds
Mutual funds are an investment that pools capital from many investors, then invest it into stocks, bonds, and other assets. There are specific stock funds or bond funds or other variations like income funds or gorwth funds. These investments are managed by professional fund managers who work to diversify the investments and try to grow their funds.
An individual or institution can invest in a mutual fund by buying shares of the fund. Mutual funds are considered to be one of the most accessible ways for individuals to make investments because they typically don't require an initial investment of more than $1,000.
2) Index fund
An index fund is a passively managed mutual fund that seeks to replicate the return of a market index, such as the S&P 500 or the Swiss Market Index (SMI).
An index fund is based on a specific investment strategy called passive investing. This means that the portfolio managers select stocks or other securities in accordance with a predetermined set of criteria and will not trade them actively to try to beat any given market benchmark. The goal is to provide the advantages of diversification at a lower cost than actively managed funds.
3) Money market fund
A money market fund is a type of mutual fund that invests in very short-term investments such as certificates of deposits, commercial paper, Treasury bills, and other instruments with maturities typically lasting between one day and two years. These funds are designed to serve as safe and easy-access places for people's cash that earn a slightly better return than a savings account.
4) ETFs
An exchange-traded fund (ETF) is a marketable security that tracks an index, a commodity, bonds or other assets. The most popular ETFs track indices like an index fund. The major difference between ETFs and index funds is that ETFs trade like shares on a stock exchange, where the price fluctuates throughout the day. Index funds are priced once per day at the NAV.
5) Hedge Fund
Hedge funds are investment vehicles that will invest in securities similar to a mutual fund but will utilize more high-risk investment strategies that include derivatives, arbitrage and going short.
These funds have a goal of generating absolute returns in their investments, meaning they are not simply seeking to beat a benchmark index but to always earn a profit - either through capital appreciation or income. Hedge funds enjoy ‘light touch’ regulation because they only cater to high net worth and professional investors.
6) Fund of funds
A fund of funds is a type of hedge fund that invests in other hedge funds. These are sometimes referred to as multi-manager funds.
This is the most popular way for an individual to invest in hedge funds. A fund of funds manager will collect capital from his investors and put it into a variety of other, already established hedge funds. This way, the high risk of investing in a hedge fund is spread out and the investor can make use of the expertise of the fund of funds manager about the hedge funds he invests in.
Top funds companies by size
Fund houses or asset management companies are the public or private corporations that create the funds to invest in. According to Gajizmo, there was $11.6 trillion US assets invested in mutual funds as of August 2021.
There is more to deciding which fund company to keep your capital with than assets under management (AUM) but choosing one of the top 10 offers more stability for a beginner investor.
|
Mutual Fund Company |
Assets ($B) |
|
|
1 |
The Vanguard Group |
1725 |
|
2 |
Fidelity Investments |
1715 |
|
3 |
American Funds Investment |
1118 |
|
4 |
Barclays Global Investors |
287 |
|
5 |
Franklin Templeton Investments |
280 |
|
6 |
PIMCO Funds |
219 |
|
7 |
T. Rowe Price Investment |
192 |
|
8 |
State Street Global Advisors |
177 |
|
9 |
OppenheimerFunds |
130 |
|
10 |
Dodge & Cox |
118 |
Source: Gajizmo.com
What are the charges for funds?
Every fund has a slightly different fee structure but mutual funds typically work on the basis of an annual fee calculated as a percentage (normally less than 1%) of the assets being managed, as well as a comission to join the fund.
FlowBank offers funds to invest in from around the globe at competitively low commissions, charged in the local currency of the fund.
How do mutual funds work?
To learn more about how investing in mutual funds practically works make sure to read our next guide that includes a discussion of mutual fund units, open and closed-end funds, active vs passive management and different fund manager strategies.
