What are investment funds?

There are a number of different investment funds with various goals and functions. So, from managed funds to hedge funds and all in between, we explain how they work.

What are investment funds?

An investment fund pools together the capital from individual investors and is typically handled by a fund manager. When you invest in an investment fund you are purchasing a unit in that fund. Investment funds can be made up of many different assets such as shares, bonds, property and cash. One of the benefits of investment funds is the diversification you can gain from a single investment.

Types of investment funds

Managed funds

Managed funds are also known as ‘managed investments’ or ‘managed trusts’, because they are a type of trust where the fund manager holds and controls the money on your behalf. Generally, managed funds are actively managed meaning that the fund manager is aiming to outperform the corresponding market.

Managed funds are either listed (traded on an exchange) or unlisted (bought and sold directly through the fund manager). Listed funds are valued according to supply and demand, whereas unlisted funds are valued weekly by the fund manager.

Related article: Active vs Passive funds: What’s the difference?

ETFs

Most ETFs are ‘passive’ index funds. This means the ETF aims to track the performance of a market or a benchmark index, for example an Australian share market index such as the S&P/ASX 200, or a U.S. share market index such as the S&P 500 or the Nasdaq-100. Therefore, it can never beat the market.

With ETFs you can gain exposure to a range of asset classes, including shares, fixed income and commodities, both in Australia and internationally. A key benefit of ETFs is that they can be bought and sold just like a stock on an exchange like the ASX.

Related articles: ETFs with the highest returns

Hedge funds

Hedge funds are similar to managed funds in that they are professionally managed, but differ in that the fund has far more flexibility and complexity in its investment strategies. The general objective of a hedge fund is to provide investors with positive returns in most market conditions. Most hedge funds use non-traditional investment strategies and asset classes to achieve a higher return.

Because of the complexity of hedge funds they are generally restricted to more sophisticated or high net investors. Also, most hedge funds aren’t liquid which means it takes longer to move investor’s money around and they can’t easily be sold. Many have lock-up periods where no money can be withdrawn through selling except for at certain periods, like bi-annually or quarterly.

Money market funds

A money market fund is an unlisted managed investment, with the objectives of capital preservation and yield generation. To achieve these objectives money market funds typically invest in a larger range of fixed interest products. They typically look for products that are high quality or highly liquid and are short term securities, usually with maturities of less than one year, which can provide higher returns than term deposits but with relatively low levels of risk.

How to start investing?

Before you start investing you should consider your goals, timeframe and tolerance for risk, which will likely determine your investment strategy. A clear investment strategy should inform what type of investment products are suitable for you. From there, you’ll find a plethora of online share trading platforms and brokerages to invest through.