An investment fund is a firm that pools funds from a number of retail investors and invests the same for a fee. Thus, an investment fund enables investors to gain exposure to a broad range of options. Moreover, the investment fund is able to achieve economies of scale, bringing down the trading costs.
Investment funds are suitable for investors who wish to invest in securities without studying the characteristics of the various options. Private bankers, trust managers or other advisers often direct some or all of the assets of their clients towards fund investments.
In terms of risk and reward, an investment fund can range from being ultra-safe, low-yielding bond funds to being highly-leveraged derivative hedge funds.
Types of Investment Funds
Investment funds can be open-ended or closed-ended. An open-ended fund is an investment fund that allows investors to sell their share in the fund whenever they want, whereas closed-ended investment funds require the investment to be kept locked up for a fixed period.
Investment funds can be either of the two types:
- Private funds: This type of fund involves up to 50 investors, with each contributing a significant amount of money (not less than $1 million per investor). The money is then invested into a particular class of assets. Private funds are usually closed-ended funds and are selected by people who have a long-term investment horizon. In this type of investment fund, money managers use their specialized knowledge of the selected asset class to obtain higher returns than that expected from public funds.
- Public funds: Public funds offer high flexibility, liquidity and transparency. These funds are required by law to declare their net asset value (NAV) on a regular basis. Most of these funds have an open-ended structure.
Investment Funds in Emerging Markets
The contribution of investment funds in emerging markets has risen dramatically over the past several years. Only a few investment funds, with a total cash flow of $700 million, were investing in listed securities in the emerging markets in 1984. However, within a decade, the capital targeted at emerging markets had risen to more than $100 billion, with close to a thousand funds participating in the change.
Examples of Investment Funds
Some of the high-yielding investment funds are:
- Melchior Japan Opportunities.
- Jupiter Emerging Markets.
- Invesco Perpetual Latin American.
- New Star UK Strategic Income.
- Old Mutual UK Smaller Companies.
- Old Mutual UK Select Mid-cap.
- JPMF UK Dynamic.