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Classroom — Securities Laws- Basics — Mutual Funds — Investment Funds

Investment Funds

An Investment Fund is a type of collective investment. In an Investment Fund, money is taken from the investors and their money is invested in bonds, stocks or shares, short-term money market instruments, and other types of securities. An Investment Fund is often known as Mutual Fund (there is a particular meaning for Mutual Funds in the United States). In case of an Investment Fund, the investment decisions are managed by a Fund Manager or Investment Manager. A Fund Manager has a lot of responsibilities. He is responsible for the buying and selling of the underlying securities of the funds, he obtains the profits or losses, and he is also responsible for collecting the interest earnings or dividend. The sales proceeds of the investment are forwarded to the individual investors.

The Net Asset Value (NAV) refers to the current market value of the holdings of an Investment Fund, and it is commonly represented as a per-share amount. It is the value of an unit or share of an Investment Fund. In many cases, the NAV is calculated on a daily basis, but in case of some Investment Funds, the NAV is updated for a number of times within the day of trading. The calculation of NAV is done by dividing the total value of the fund by the number of currently issued shares and outstanding shares.

The securities transactions of the fund is measured by Turnover. Generally, it is calculated over a year's time, and is represented as a percentage of NAV.

Like other companies, Investment Funds or Mutual Funds carry certain expenses such as management fee, nonmanagement expenses etc.

The Investment Funds can be categorized into the following types:

Open-End Fund: An Open-End Fund is that type of a fund, in which there is no restriction on the number of shares that will be issued by the fund. There is also a buyback option if the investors want to sell the shares.
Exchange-Traded Fund (ETF): The Exchange-Traded Fund is developed as an open-end investment company in many instances. They have both the characteristics of mutual funds and closed-end funds.
Equity Funds: The Equity Fund is the most general form of Mutual Fund. Equity Funds primarily involve stock investments. The Examples of Equity Fund are Growth Funds, Value Funds, Sector Funds, Income Funds, and Balance Fund.
Bond Funds: 18% of the Mutual Funds are represented by Bond Funds. The different types of Bond Funds include Term Funds, Municipal Bond Funds, and High-Yield Bond Funds.
Money Market Funds: In the United States, 26% of the Mutual Fund Assets are held by Money Market Funds. In this kind of Funds, the risk as well as the rate of return is low.
Funds of Funds (FOF): They are funds made up of investment in other mutual funds.
Hedge Funds: A Hedge Fund is that type of an Investment Fund, which charges a performance fee and only a limited number of investors can access Hedge Fund.
Closed-Ended Fund: In this kind of fund, a limited number of shares (or units) are issued in an IPO (Initial Public Offering).

The advantages available from Investment Funds are Professional Management, Diversification, Economies of Scale, Liquidity, and Simplicity. The different kinds of risks involved in Investment Funds are Capital Risk, Currency Risk, and Liquidity Risk.