A Mutual fund is a simple investment method, an excellent choice for novice investors.

People who want to invest have probably heard of investment funds. These products may seem favourable and convincing to novice investors.

As we have previously told you in our article specifically written on diversification, when investing diversification from different products is important because it can reduce risk and increase your portfolio’s security against major losses. 

An investment fund is a perfect choice for this, as it allows you to put invested money in several places with less time expenditure..

The concept and operation of a Mutual fund

An investment fund should be considered a coffer** within which anyone can deposit their money. Contributors own the coffers in different proportions, depending on their level of input and will receive their profits on this basis also.

Just like with shares, the more value you invest the more ownership you will build.

All an investor has to do is carry out the initial depositing of their capital into the coffer: the collective amount is then managed by appointed experts.

Why is this a good thing?

The fund manager can invest in several products that they believe to be profitable, which means you can gain a higher level of diversification from this one product, yet you don’t have to do anything to contribute it to your portfolio.

These products can be very diverse: what matters most is what provides the highest returns in the current market. Also included are a wide range of securities, real estate, bank deposits and shares.

The creation of an investment fund is the responsibility of the fund manager, which means they are also soley responsible for management of that fund.

** Coffer:

1. a strongbox or small chest for holding valuables.
2. the funds or financial reserves of an organization.

Investment Fund or CopyTrading?

If you don’t want to invest in an investment fund online, CopyTrading would be the next best alternative.

The CopyTrading feature, which can be found on eToro, is similar to how an investment fund works:

You can elect to mirror the investment habits of your investors that you have chosen yourself. Here your money will essentially be invested in products for you by the selected investor(s) as you would be following their decisions.

As CopyTrading is an entirely free service, which proves to be a convenient, and very helpful, investment tool for novice investors who may have less market experience or knowledge than most.

Find out more about eToro CopyTrading

Types of investment funds

Grouping of investment funds

Investment funds are more often grouped according to the type of products they include in their indexes. On this basis, we can talk about the following types:

• Money market investment fund: this type invests in money market funds, government securities and various bank deposits.
• Bond funds: different bonds are bought under this kind of fund.
• Equity funds: here shares offered by different companies are the focus.
• Mixed funds: within in this portfolio, you will find a combination of both stocks and bonds.
• Real estate investment funds: this type of fund will invest in properties that have already been built, or are currently under construction.

Special investment funds

• Absolute return funds: they do not have a specific investment area, as the fund manager selects this depending on the market’s current performance.
• Capital-protected funds: the invested capital is paid back as a guarantee after maturity.
• Derivatives: invest in securities through derivative products.

Types of investment fund

There are two distinguished investment fund types:

• An open-ended investment fund is available to anyone. Anyone with enough capital can purchase units.
• Private investment funds: Only those who meet certain requirements can access a fund of this kind. As the fund manager is responsible for them, these conditions can vary between the different funds.

There are also closed-end investment funds, which operate with maturity. You can only redeem the invested money after the maturity has expired, which will result in the termination of the investment fund. 

On the other hand, an open-ended fund can be redeemed at any time. In addition, there is also an open-ended fund that allows you to buy an investment ticket continuously.

Investment fund maturity

The fund’s duration varies, starting from a few months, spanning all the way up to 3 years.

Funds with the shortest maturity are called liquidation funds and they invest in bonds with maturity equalling less than three months.

When it comes to investing in, the previously mentioned, closed-end funds you must be sure that you are comfortable with not being able to sell the fund asset until the end of the maturity term.

Are investment funds safe?

The risk level of an investment fund is shared with your own sole investment of a specific, self-chosen product. It is widely known that there is always a risk, with any investment portfolio. As stated in our article focused solely on diversification, you can significantly reduce a portfolio’s level of risk by investing in several products at once.

Read that article here

If you choose an investment fund, you will get so many benefits and you won’t have to invest anything yourself. A fund manager is an expert whose aim is also to make a profitable ROI.

A good choice for beginner investors

If you don’t have a lot of market knowledge or experience – or maybe you just don’t have the time to research the ins and outs of particular products – then an investment fund would be a suitable choice for you.

Although there is no form of reimbursement given when an investment fund makes losses, you would in fact receive a refund in the event that the investment service provider finds themselves unable to pay you. For example, this could happen if the provider was to be declared bankrupt and becomes insolvent.

As we have said, the risk is present here in the same way as in other investments, and the extent depends on the chosen products. Including this there are both pros and cons to utilising this kind of product, such as the following found below: 

Benefits

• Everyone will find the right type and security for them.
• You don’t have to invest a large amount of money to have ownership in a ‘coffer’.
• The overall concept can be understood by relatively anyone due to its simplicity.
• They are much more profitable than holding your money in a bank account.
• You can always get out of the investment.
• You won’t need to sacrifice time and energy researching your own products individually.

Disadvantages

• You cannot accurately determine the amount of return that will be due.
• The level of profit has many variable factors which can affect it.
• Those who understand the market can individually choose more profitable investments.
• You don’t decide where your money will be invested. (This, for some, can be worrying and cause stress)

Investing in an investment fund

To invest in an investment fund, you must have a securities account. You can open such an account with almost all banks and brokerage firms, so this shouldn’t create any problems. 

If you have the account, you are essentially ready to invest. Remember that a securities account also has costs.

By buying an open-ended investment fund, it will be easy to get out of the investment. At the current value of the investment, you can sell the product, but you have to take into account that you will not get the full price. 

Typically, you will lose 5-10% because most funds can only be sold at a lower value. This is also true for closed-end funds.

The security of your money

When investing, it’s always important to keep your money safe. Therefore, the amounts invested through investment funds can be protected by a number of different Investor Protection Funds, the one that is responsible for protecting your invested money is entirely dependent on country. Here a few examples of the different authorities:

The FCA is the first example we will use. This stands for ‘the Financial Conduct Authority’ and this one in particular serves the UK

The next example would be CIPF, which stands for the Canadian Investor Protection Fund.

Finally, the overarcing organisation that covers the US is the SEC, standing for ‘The Securities and Exchange Commission’. This is the number one regulatory body in America.

Investment fund costs

When investing, you also need to consider any costs. It matters what conditions you start your portfolio; this is because your portfolio’s overall yield is greatly influenced by the costs you incur along the way.

Simply put, if you have to spend half of it on expenses, the money you make would be much less. An investment fund is no exception to this and so it is worth considering the costs of the given product before making a decision.

Most costs are indicated as a percentage. The 1-2% figures may seem small, but a 2% fund manager fee could potentially mean millions in the long run. The more money you invest, the higher your costs.

In the case of an investment fund, the following fees may be incurred:

• Fund manager’s fee: This is deducted from the total assets each year, and typically stands between 1-3%.
• Supervisory fee: Mandatory fee, which is usually 0.1%.
• Custody fee: A fee paid to the depositary ranging from 0.05% to 0.3%.
• Success fee: Most funds pay a fee when you make a profit. This can reach up to 20% of the yield. This is the largest of the fees you will come across, pay special attention to what percentage this stands at before starting any investment.

Annual costs

In addition to the listed fees, other costs may occur. The rate of these range from 0 to 1%.

It is important to note that regardless of whether a profit is made from the investment or not,

costs must be paid every year.

The success fee is the only exception, in that it is charged only in the case of a positive return.

Selection of the investment fund

Since there are so many choices, at first it can be  difficult to know which product is best for you. There are three things that can help you make your decision.

Maturity affects yield

There are investment funds that are only worth withdrawing for a long term. Short-term funds usually mean little profit, so expect to be without money for up to 4-5 years before investing.

The risk should not be forgotten about

Without risk there would be no profit, this is because the two are directly proportional to each other. The higher the risk, the higher the return you can expect. For novice investors, it is recommended to choose low-risk investments when first starting out.

Keep your goal in mind

If your aim is to use your invested capital in the near future, it would be more worth it for you to invest a low-risk stake.

If you don’t have a specific investing strategy and you just want to make money, as an advantage you could try trading in higher-yielding products.

Why invest in an investment fund?

There are a number of positive reasons as to why investment funds are worth looking into, some of these are:

• Easy to buy. Mutual funds are available to anyone, and no investor experience is necessarily required to buy them.
• Cost-effective. Investment funds usually have low costs.
• The risk is managed effectively. Mutual funds invest in many products at once, so they are typically not as risky as self-investing.
• A flexible investment. Investment funds can be purchased and sold at any time, so there is no need to adjust to a predetermined maturity.
• Expert help. Your money is invested by experienced professionals who know a lot more about how the market works, when compared to that of novice investors.

Other investment opportunities;

There are many other investments on the market that may be better suited to your needs. Before you make any final decisions, compare any considered investments based on profitability, risk, maturity and the relevance each one has to your own goals/aims.

Frequently asked questions

Who can invest in investment funds?

Anyone can invest in open-ended investment funds. You just need to have enough spare capital to buy into an investment fund.

Where can I buy an investment fund?

You can also invest in investment funds through banks and brokerage firms. If you invest through a bank, you will need a securities account.

How risky is an investment fund?

The risk of investment funds depends on the products chosen. Your money will be invested by experienced investors in products that they have determined will become profitable.

Every investment fund has a level of risk. If you want a lower risk, you need to choose the right basis for it.

What is the minimum recommended investment period?

During the minimum recommended investment horizon of the investment fund, exchange rate fluctuations are balanced. If you invest for a smaller horizon, you can reduce the level of risk the fund will expose you to.

Who invests the money paid into the fund?

The fund’s coffers are managed by experienced, expert investors. Their goal is also to invest the money raised into profitable sources.

Synopsis

An investment fund is a diverse investment option, so it is recommended for novice investors to utilise this type of product – this is also recommended partly due to the level of risk management that goes into it.

Those who are looking for a higher return at higher risk would also be able to find the right product for them. 

Lastly, from this article, we know that more experienced investors are able to find more profitable options due to their market knowledge and experience, allowing them to know more certainly which product is a good prospect and which is not