Collective Investment Schemes: Invest And Grow Together

Investment funds are a supply of capital from multiple investors, which is used to collectively purchase securities. The fund manager decides which securities to hold, in what quantities, and when to buy and sell them. Investment funds provide a broader selection of investment opportunities, greater management expertise, and lower investment fees than investors might be able to obtain on their own.

There are several types of investment funds, including mutual funds, exchange-traded funds (ETFs), money market funds, and hedge funds. Mutual funds pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. ETFs are similar to mutual funds but are traded on public exchanges like stocks. Money market funds are a type of mutual fund that invests in short-term debt instruments and cash equivalents. Hedge funds, on the other hand, are for high-net-worth individuals and institutions and employ high-risk strategies to maximise returns.

Mutual funds

There are many types of mutual funds, with most falling into four main categories: stock, money market, bond, and target-date funds.

Exchange-traded funds (ETFs)

ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of securities. They can even be designed to track specific investment strategies. Various types of ETFs are available to investors for income generation, speculation, and price increases, and to hedge or partly offset risk in an investor’s portfolio. The first ETF was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index.

An ETF divides ownership of itself into shares that are held by shareholders. Shareholders indirectly own the assets of the fund and are entitled to a share of the profits, such as interest or dividends, and would be entitled to any residual value if the fund undergoes liquidation. They also receive annual reports.

ETFs are priced continuously throughout the trading day and therefore have price transparency. They are also more tax-efficient than mutual funds. There's generally more turnover within a mutual fund relative to an ETF, and such buying and selling can result in capital gains. Similarly, when investors go to sell a mutual fund, the manager will need to raise cash by selling securities, which can also accrue capital gains. In either scenario, investors will be on the hook for those taxes.

ETFs are made up of stocks, but there is no such thing as an "ETF stock". You can purchase a share of an ETF, but you cannot purchase stock in an ETF. ETFs are made up of individual stocks and other investments.

ETFs are sometimes focused around certain sectors or themes. For example, SPY is one of the ETFs that tracks the S&P 500, and there are fun ones like HACK for a cybersecurity fund and FONE for an ETF focused on smartphones.

ETFs are regulated by governmental bodies (such as the SEC and the CFTC in the United States) and are subject to securities laws (such as the Investment Company Act of 1940 and the Securities Exchange Act of 1934 in the United States).

Money-market funds

Money market funds are intended to offer investors high liquidity with a very low level of risk. They are insured by the Securities Investor Protection Corporation (SIPC) but not by the Federal Deposit Insurance Corporation (FDIC).

Money market funds are a safe avenue for investing in secure and highly liquid, cash-equivalent, debt-based assets using smaller investment amounts. They are characterised as low-risk, low-return investments. Many investors prefer to park substantial amounts of cash in such funds for the short term.

Money market funds are not suitable for long-term investment goals like retirement planning because they don't offer much capital appreciation. They are, however, a useful and profitable place to put cash for a relatively short time frame, rather than keeping it in a standard savings account where it won't earn much interest.

Money market funds aim to maintain a net asset value (NAV) of $1 per share and are popular for their stability and regular income generation. They are sensitive to interest rate fluctuations.

The interest rates available on the various instruments that constitute the portfolio of a money market fund are the key factors that determine the return from a given money market fund.

Money market funds are regulated under the Investment Company Act of 1940. In 2010, following the 2008 financial crisis, the SEC issued new rules to better manage money market funds and provide more stability and resilience.

Hedge funds

Overall, hedge funds are a type of investment fund that employs aggressive strategies and invests in a diverse range of assets. They are targeted towards wealthy investors and carry higher fees and risks compared to other types of investment funds.

Government bond funds

There are different types of government bond funds, including US government bond funds, municipal bond funds, corporate bond funds, mortgage-backed securities (MBS) funds, high-yield bond funds, emerging market bond funds, and global bond funds.

US government bonds, often referred to as Treasuries, are considered low-risk investments due to the backing of the federal government. They include Treasury bills (maturing in less than a year), Treasury notes (maturing in one to ten years), and Treasury bonds (maturing in more than ten years).

When investing in government bond funds, it's important to consider the fees associated with them, such as annual fees, expense ratios, or commissions, which will impact the overall returns.

Frequently asked questions