In the market there are many different products to invest in according to your goals and also depending on your risk profile. Only some of them will be versatile enough to adapt to your circumstances at every stage of your life. Investment funds are one of these.
Don’t you know about them? In this article we are going to talk about what investment funds are and how can they help you.
What is an investment fund?
You may have heard of investment funds and even have an idea about what they are. Now you will really understand what a mutual fund is and how it works. A fund is a Collective Investment Scheme, which is a tool that brings together the money of many small savers to invest it in a pool of diversified assets.
To make it easier to understand, an investment fund is a product that combines the savings of many people and then puts them in the hands of a team of investment experts, the fund managers, so that they can make the money grow.
It’s like getting together with several friends to rent a cottage, a yacht or a place for a party, or like when you used to buy a videogame with other friends when you were a kid.
What are the advantages of investing with other people? Although we will go into the characteristics of investment funds a little further on, one of the advantages of these is that you can:
- Gain access to professional managers that would otherwise cost you a lot of money to hire, or would not be worth it.
- Diversify your investments and have a more balanced portfolio for less money.
- Access asset types beyond your reach as an individual.
In short, you can do things that you alone with your savings could not, or would not be able to do because of the costs and fees involved.
How does it work and what is it for?
To understand how an investment fund works, you first need to be aware of the three figures that are involved in this product:
- The investor in the fund, in other words, the person who invests in the product.
- The fund manager, who is in charge of investing the investors’ money. These are investment professionals who decide how, when and in what to invest your money. They charge a commission for this work.
- The depositary entity, whose mission is to safeguard your money and, above all, to manage the fund’s liquid assets. They charge a commission for this work.
In essence, as an investor you entrust your money to the fund manager so that they can handle it and achieve a return in line with the fund’s objectives.
From a slightly more technical point of view, these funds work in the following way: when you put money into an investment fund you buy one or more units in that fund, just as in a listed company you buy shares. The value of these units is calculated by dividing the fund’s assets by the number of units. Its value is always calculated at the end of the day and this rises or falls in line with the assets in which the fund invests. These assets could be stocks, government bonds, other funds, commodities, and so on.
Investing in a fund is not so different from creating your own investment portfolio. The main difference is that here it is experts who try to make your money grow and, as they manage a bigger pot of money, they can implement more efficient and different strategies than you would be able to on your own.
All this, as is logical, entails a series of costs and commissions, which also define how investment funds work.
Advantages of investment funds
- Flexibility
- Diversification at a lower price
- It is a liquid investment
- They are managed by professionals
- Funds are regulated
- They are transparent
