Understanding Investment Fund Basics

Everyone has heard the basic investment strategy advising them to have a diversified portfolio. Ultimately, you should have a mix of liquid funds, low risk/low return and high risk/high return investments.

Investment funds are one instrument you can use to help spread out your finances and automatically end up with a variety of investment opportunities in one fell swoop.

Pooling Money

Investment funds are commonly known as collective investment schemes. Although the name may sound sinister, simply stated, money is pooled by a variety of investors to help give them buying strength.

The goal is that the investment fund will turn a profit. By investing your money into a type of investment fund, more than likely you will be able to invest in securities that would normally be out of the price range of an individual investor.

Each investment fund has a manager who is responsible for overseeing the financial health of the investment and to properly carry out the instructions of the investors of that specific fund.

Investment Fund Composition

In the United States, investment funds is a broad term encompassing three general types of funds. According to the U.S. Securities and Exchanges Commission they are:

  • Mutual Funds – An investment fund that collects money from many individuals and invests in a variety of assets and securities in combination
  • Unit Investment Trusts- A one-time only public offering of a specific number of securities called units; the unit investment trust will end on a predetermined date
  • Closed End Funds- The selling of certain shares all at once that will later trade on another market, as typically what happens in an IPO

Building Wealth

All three are considered collective investment schemes, but they have nuances and behaviors that make them act differently than their other investment fund counterparts.

If you are considering diversifying your portfolio to help increase your profit margin, you need to properly investigate the investment funds that you may be interest in to ensure that you understand all the terms of the fund.

About the Author

GOBankingRates Staff

These articles are written by the in-house GOBankingRates team.

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