Investment funds: Meaning, types and examples

Are you someone who wants to potentially grow your money but isn’t sure where to start? You might have heard friends or family talk about mutual funds or investing in the market.

If you’re a beginner, the process of investing can sound confusing. But by getting some of the basics right, it can indeed become very easy to understand.

In this article, we’ll take a closer look at what investment funds are, how they work and the different types of investment funds with examples. Using this information, you can begin your investment journey with greater awareness and confidence.

• Table of contents

• What is an investment fund?
• How do investment funds work?
• Types of investment funds
• Examples of mutual funds
• Advantages of investment funds
• How to choose an investment fund
• How to invest in investment funds
• Who should invest in investment funds?

What is an investment fund?

An investment fund is a vehicle that pools money collected from multiple investors. The money is used to buy different kinds of investments like shares (stocks), bonds, or other assets. It’s like everyone chipping in to buy a big cake and then sharing the slices.
Mutual funds are one type of investment fund. So, if you’ve heard of mutual funds, you already know a bit about investment funds.

How do investment funds work?

Here’s a simple way to understand how investment funds work:

• You invest your money in the fund.
• A professional fund manager handles the fund. They decide where to invest the money to try and make profits.
• The fund buys a mix of investments, such as shares, bonds, or real estate-related assets.
• Any profit (or loss) from these investments is shared among all investors based on how much they invested.

Investment funds are typically diversified across multiple assets, which helps you spread out your risk. Even if one asset doesn't do well, others in the fund might balance it out.

Also Read: What is a mutual fund: Meaning, types, and benefits

Types of investment funds

Investment funds come in various forms, each designed to meet specific investment goals and preferences. They can be classified based on various parameters – structure, investment universe, target clientele etc. Here's an overview of the main types:

1. Open-ended funds
   • These funds allow you to invest or withdraw money at any time.
   • Units are created or redeemed based on investor demand.
   • Most mutual funds fall into this category.
2. Close-ended funds
   • These funds are open for investment only during the launch period (NFO – New Fund Offer).
   • After that, units are listed on stock exchanges and traded like shares.
   • You cannot redeem directly from the fund after the NFO closes.
3. Publicly-traded funds
   • These are funds that are listed and traded on the stock market, like ETFs.
   • You can buy or sell units through a broker, just like stocks.
4. Private equity funds
   • Usually meant for high-net-worth individuals or institutional investors.
   • They often involve higher investment amounts and complex strategies.
   • This can make them higher risk but with higher return potential
5. Mutual funds
   • A popular and relatively beginner-friendly type of investment fund.
   • Pool money from investors to invest in a wide range of securities like shares and bonds.
   • Professionally managed and widely accessible, with a low barrier to entry
6. Actively managed funds
   • A fund manager chooses where to invest based on research and market conditions.
   • The goal is to deliver potentially higher returns than the relevant market segment in the long term.
   • These usually have higher management fees.
7. Hedge funds
   • Use high-risk strategies like short selling, leverage, or derivatives.
   • Aimed at high return potential but with higher risk.
   • Not recommended for beginners or small investors.
8. Index funds
   • A type of passive mutual fund that copies a market index like the Nifty 50 or BSE Sensex.
   • Relatively lower cost and suitable for long-term, hands-off investors.
9. Exchange-traded funds (ETFs)
   • Like passive mutual funds but traded on the stock exchange.
   • Combine the diversification of mutual funds with the flexibility of stock trading.
   • Usually track an index and are passively managed.
10. Fund of funds (FoFs)
    • These funds invest in other investment funds instead of directly investing in stocks or bonds.
    • Offers diversification across different types of funds and strategies.
    • Can include a mix of mutual funds, ETFs, and even international funds.

Each of these types of investment funds serves a different need. Whether you want potential growth, relative stability, low cost, or professional guidance, there’s a fund type that can suit your style. Choosing a suitable one depends on your goals, time frame, and comfort with risk.

Examples of mutual funds

To understand how mutual funds work, it's helpful to look at the different types of funds and what they aim to achieve:

• Large-cap equity funds invest in the top 100 companies in terms of market capitalisation. These are usually relatively stable and are chosen by investors looking for the potential for relatively steady, long-term growth.
• Index funds follow a specific stock market index like the Nifty 50 or BSE Sensex. They aim to match the performance of the overall market and often come with lower fees.
• Balanced or hybrid funds invest in a mix of shares (equity) and bonds (debt). These are designed to offer a balance between potential growth and relative stability.
• Debt funds focus mainly on fixed-income instruments like government bonds or corporate debentures. These are suitable for those who prefer lower risk.
• Sector funds invest in specific industries like technology, healthcare, or banking. These can offer high return potential but may also carry higher risk if the sector doesn’t perform well.

Advantages of investment funds

Investment funds offer many benefits, especially if you're new to investing. Here are some key advantages of investment funds:

• Diversification: Your money is spread across many investments. This reduces risk.
• Professional management: Experts handle the investing part for you.
• Affordable entry: In mutual funds and ETFs, you can start with a small amount, such as Rs. 500 generally.
• Flexibility: There are various fund types based on risk profiles and financial goals.
• Liquidity: Open-ended funds let you withdraw money when you need it.

How to choose an investment fund

Choosing the right fund depends on your needs and comfort with risk. Here’s how you can decide:

1. Set your goal: Are you investing for a house, your child’s education, or retirement?
2. Know your risk level: Can you handle ups and downs in the market?
3. Assess your investing capacity: Retail investors may find mutual funds suitable, while HNIs or institutional investors with a very high risk appetite may consider PMS, hedge funds, AIFs etc.
4. Look at the fund manager’s experience: A skilled manager makes a big difference.
5. Compare fees: Lower fees mean higher net potential returns.

How to invest in investment funds

Starting is easier than you might think. Here's how to invest in investment funds:

• Online platforms: Many apps and websites allow you to invest easily.
• Through a bank or financial advisor: You can also talk to someone who will guide you.
• Directly with fund companies: Most fund houses allow direct investments via their websites.

Make sure to complete your KYC (Know Your Customer) process before investing. It’s a one-time process.

Who should invest in investment funds?

Investment funds, especially mutual funds, can be suitable for:

• First-time investors: Start small and learn as you go.
• Busy professionals: Let experts handle your money while you focus on work.
• Retired individuals: Some funds offer regular income options.
• Students or young earners: Begin building wealth early, even with small amounts.

Because there are different types of investment funds, you can choose one that suits your situation.

Also Read: All you need to know about Alternative Investment Funds

Conclusion

Investment funds can be a relatively simple way to potentially grow your money without needing to be a financial expert. Whether you’re just starting or looking to expand your investment portfolio, understanding the meaning of investment funds, how they work, and how to invest in investment funds can help you make more strategic financial choices. Take your time, start small if needed, and explore your options.

FAQs

What is an investment fund called?

An investment fund is also commonly known as a pooled fund. It combines money from several investors to invest in different assets like shares, bonds, or property.

What is the difference between a mutual fund and an investment fund?

A mutual fund is a type of investment fund. All mutual funds are investment funds, but not all investment funds are mutual funds. There are other types like ETFs, index funds, and hedge funds.

Who runs an investment fund?

A professional fund manager runs the fund. Their role is to decide where and how to invest the pooled money to optimise return potential and manage risk.

Do investment funds charge fees?

Yes, most investment funds charge a fee called an expense ratio. It covers management and administrative costs. Some funds may also have entry or exit charges.

How can you choose the right investment fund?

Look at your financial goal, risk level, fund performance, manager experience, and fees. A little research goes a long way in finding the suitable fit.