Faith Morrow
Investment funds are a great way to invest your money. They are a supply of capital belonging to multiple investors, used to collectively purchase securities. There are many types of investment funds, each with its own benefits and drawbacks. The most common types of investment funds include mutual funds, exchange-traded funds (ETFs), money market funds, and hedge funds. Each of these investment funds has different risk factors, fees, and potential returns. It is important to understand the basics of each type of investment fund before deciding where to put your money.
| Characteristics | Values |
|---|---|
| Type of Investment Fund | Mutual Fund, Exchange-Traded Fund (ETF), Money Market Fund, Hedge Fund |
| Ownership | You retain ownership and control of your shares |
| Decisions | You choose a fund based on its goals, risks, fees, etc. A fund manager decides which securities to hold and when to buy and sell |
| Broader Selection | Yes |
| Management Expertise | Yes |
| Lower Investment Fees | Yes |
| Open-End or Closed-End | Open-end funds issue new shares as investors add money and retire shares as investors redeem. Closed-end funds trade similarly to stocks and are priced and traded throughout the day |
| Accessible to Individual Investors | Yes |
| Tax Implications | Yes, there are tax implications depending on the fund type |
What You'll Learn
Mutual funds
There are several types of mutual funds, including:
- Stock funds: These invest principally in equity or stocks and are further categorized by the size of the companies they invest in and their investment approach.
- Money market funds: These funds invest in safe, short-term debt instruments and have relatively low risks.
- Bond funds: These funds aim for higher returns than money market funds and carry higher risks.
- Target-date funds: These hold a mix of stocks, bonds, and other investments, gradually shifting the mix over time according to the fund's strategy.
- Index funds: These funds aim to replicate the performance of a specific market index, such as the S&P 500, and are known for their low costs.
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Exchange-traded funds (ETFs)
ETFs are bought and sold from other owners on stock exchanges, whereas mutual funds are bought and sold from the issuer based on their price at the end of the day. ETFs are also more transparent since their holdings are generally published online daily. In the US, ETFs can be more attractive from a tax perspective than mutual funds for transactions made in taxable accounts.
ETFs can be passively or actively managed. Passively-managed ETFs seek to achieve the same return as a particular market index and are often called index funds. Actively-managed funds buy or sell investments consistent with a stated investment objective. The largest ETFs, which passively track stock market indices, have annual expense ratios as low as 0.03% of the amount invested, although specialty ETFs can have annual fees of 1% or more.
ETFs are suitable for investors looking to diversify their portfolios and save for short-term goals. They are also a good option for investors who want to trade shares live during the trading day and take advantage of real-time pricing.
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Hedge funds
Examples of notable hedge funds include Bridgewater Associates, Renaissance Technologies, and AQR Capital Management.
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Money market funds
There are several types of money market funds, including government MMFs, which invest primarily in cash, government securities, and repurchase agreements; short-term credit (Prime) MMFs, which can invest in securities issued by non-government entities; and municipal MMFs, which invest in municipal bonds and offer potential tax benefits to investors.
Overall, money market funds are a safe and liquid investment option, providing diversification and ease of management for investors.
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Sub-advised funds
A sub-advised fund is an investment fund where the assets are held by one firm but managed by a third-party money manager or another management team. This outside manager is brought in by the fund company because of their expertise in a certain area of the market or a specific strategy. Sub-advised funds are typically sought by investment companies to benefit from their expertise in managing a specific strategy.
Sub-advisory fee structure agreements vary across the investment market. Fees for sub-advised funds are typically higher due to the multi-layered relationships involved with offering a sub-advised fund. In general, investors should more closely examine the fee structures of sub-advised funds because they are often higher and more complex than traditional fund offerings.
Despite potentially higher fees, other aspects of a sub-advised fund can be advantageous for investors. Specifically, sub-advised funds are typically managed by fund managers with in-depth experience and expertise in managing a certain strategy. Fund managers for sub-advised funds are often sought out for their strategy expertise, offering investors the best strategy option in the market.
Sub-advisory relationships span across the entire investment universe. Any type of fund can be sub-advised. Mutual funds and variable annuities are some of the most common sub-advised offerings.
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Frequently asked questions
An investment fund is a supply of capital from multiple investors, used to collectively purchase a diversified portfolio of securities. Investment funds are managed by professionals and provide investors with access to a broader selection of investment opportunities, greater management expertise, and lower investment fees than they 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. Each type of fund has its own characteristics, investment strategies, and risk profiles.
When choosing an investment fund, it's important to consider your investment goals, risk tolerance, management style, fees, and historical performance. It's also essential to understand the different types of funds available and select the one that aligns with your financial objectives and risk appetite.
Mutual funds offer several advantages, including diversification, professional management, and economies of scale. They provide investors with access to a diversified portfolio of securities, which helps spread risk across multiple investments. Mutual funds are also managed by professionals, who make investment decisions on behalf of the fund's investors. Additionally, mutual funds benefit from economies of scale, as they pool a large amount of capital from multiple investors, potentially resulting in lower fees and better investment opportunities.
Investment funds carry various risks, including market risk, interest rate risk, and management risk. Market risk refers to the potential decline in the value of the securities held by the fund. Interest rate risk affects funds with investments in bonds and other fixed-income securities, as changes in interest rates can impact their value. Management risk is associated with the performance of the fund's management team; poor investment decisions can negatively impact the fund's returns. It's important for investors to carefully consider these risks before investing and to diversify their investments to mitigate potential losses.
