Investment funds are one of the most popular strategies for obtaining returns. To get the most out of them, it’s important to know what they consist of and what types are right for each investor. 

What’s an investment fund? 

An investment fund is a financial vehicle (also known as a collective investment scheme or “CIS”) that pools money contributed by a group of individuals to invest in derivatives, fixed-income securities, shares and other financial instruments. You can learn more here on Finanzas para Mortales.

What do we gain from investment funds? These vehicles give people access to markets they would otherwise have a hard time investing in individually. They also help diversify investments. They put investors’ savings in the hands of investment managers who scan the market for the best opportunities to generate a profit.

What benefits do investment funds offer?

Investment funds give people the chance to apply strategies to invest in many financial markets and assets whenever they choose. They provide highly flexible conditions for redeeming or transferring assets, in addition to tax benefits in many jurisdictions. Find out more on Finanzas para Mortales.

How to invest in investment funds

Investing in investment funds involves several key players. First, there is the investor (which some investment schemes designate as “participant”, the “unitholder” or the “shareholder”). Next is the management company, a company that provides unitholders with advisory services and invests their money in the securities (e.g., bonds and shares) in the investment fund’s portfolio. The management company may offer many funds with particular features and conditions. Lastly, a depositary entity safeguards fund assets (i.e., the money invested) and monitors everything the fund manager does on the unitholders’ behalf. 

The value of investment funds depends on the yield of all financial assets they invest in with the money they pool from investors.

How does an investment fund work?

We already know the players: investors, management companies and depositaries. Investors must first acquire units in a fund they choose. The price per unit is fund’s “net asset value”. How is it calculated? By dividing the fund’s total equity by the number of investors. Because investors can sell (“redeem”) the units or shares they own whenever they want, the fund’s equity value can rise or fall. 

Management companies administer fund’s investments. They aim to find the best opportunities and financial products for investors’ money and may offer the customers a selection of funds with varying risk and rates of return. 

Funds’ profitability depends on the yield of the assets they invest in. 

What types of investment funds are there?

There are many types of investment funds, each with their own characteristics:

• Money market funds, which invest in short-term fixed income.
• Real estate investment trusts, which are not financial in nature.
• Foreign funds, which are authorized to trade abroad.
• Bond, stock and blend funds.
• Totally and partially guaranteed investment funds.
• Passively-managed funds, which mirror a particular index.
• Absolute return funds, which aim to achieve positive returns regardless of market trends.
• Hedge funds, which aim to maximize returns regardless of market trends.
• Global funds, which abide by special rules.

How to choose an investment fund

Before choosing an investment fund, it’s important to know its risks, costs and other features, and to spend enough time researching it to make an informed decision. We can use an investment fund simulator, a calculator that works out how much we should invest for a specific rate of return, with a suitability test from management companies to ensure a fund suits our investor profile. 

As investors, we should take into account our personal finances, objectives and the level of risk we are prepared to assume so that our investments match our profile and circumstances. 

A key factor is the investment term. Each fund has conditions on guarantees, the investment term and the markets in which it invests. Investors should make investments within their means. Other key factors are a fund’s redemption and management fees or period and rate of return . To learn more, here are some tips from Finanzas para Mortales.