Investment fund

An investment fund is a method of pooling money from many different investors. By working together as a group, individuals can access financial advantages that they might not achieve alone. One primary benefit is the ability to hire professional investment managers. These experts aim to provide better returns and manage risks more effectively than a single person might. Another advantage is called economies of scale, which helps reduce transaction costs. Most importantly, funds allow for asset diversification. This process spreads money across many different investments to reduce unsystematic risk.

To understand how a fund operates, one must look at its internal structure. Most funds rely on several distinct roles to function. A fund manager makes the primary investment decisions. A fund administrator handles daily tasks like trading, valuation, and unit pricing. A board of directors or trustees works to safeguard the assets and ensure legal compliance. The actual owners of the assets are called shareholders or unitholders. Finally, marketing or distribution companies are used to promote and sell the fund's shares to the public.

There are several specific types of investment vehicles used today. An open-end fund creates new shares whenever an investor adds money. The price of these shares changes in direct proportion to the fund's net asset value (NAV). The NAV is calculated by taking the total value of the assets and subtracting all liabilities. In contrast, a closed-end fund issues a fixed number of shares through an initial public offering (IPO). These shares trade on an exchange, and their price may be at a premium or a discount to the NAV. In the United States, there were 506 closed-end mutual funds at the end of 2018, holding $0.25 trillion in assets.

Exchange-traded funds, or ETFs, combine features of both open-end and closed-end funds. They are structured as open-end investment companies but trade on an exchange throughout the day. An arbitrage mechanism helps keep their trading price close to the NAV of the holdings. In the U.S., there were 1,988 ETFs at the end of 2018, with combined assets of $3.3 trillion. Another type is the unit investment trust (UIT). UITs are issued only once and often have a limited life span. Unlike other mutual funds, a UIT does not use a professional investment manager. At the end of 2018, there were 4,917 UITs in the U.S. with assets totaling less than $0.1 trillion.

Some funds use a strategy called gearing, which is also known as leverage. This involves borrowing money to make even more investments. If the market grows quickly, gearing can increase the fund's total growth. However, if the cost of borrowing is higher than the growth achieved, the fund suffers a net loss. This process can lead to high volatility and increased capital risk. A notable example of this risk occurred in 2002 with the collapse of the split capital investment trust in the United Kingdom.

Investment funds can be categorized by who is allowed to buy them. Public-availability vehicles are open to most investors within a specific country. Limited-availability vehicles are restricted by law to experienced or sophisticated investors. These often require very high minimum investments. Finally, private-availability vehicles may be restricted to specific groups, such as family members. These are not traded publicly and are often used for tax or estate planning. Funds can also target specific areas, such as the technology sector or the European market.

Regulation is a vital part of the investment fund industry. In the European Union, the term "collective investment scheme" is a legal concept. The UCITS directives created a structure so that funds could be marketed across any EU member state. These rules ensure that products are transparent and that terms are fully disclosed to the public. In the United Kingdom, the Financial Services and Markets Act 2000 sets the requirements for these schemes. These laws help maintain order in the complex world of global finance.