One usually thinks about investment funds in the context of investing money for the future retirement or education of their children. Looking at this kind of investment as an alternative for individual pension fund is especially common in the generation currently in their forties. But how to start investing like this?
Investment fund – what is it?
An investment fund is a way to invest collectively. In other words, participants allocate their capital in a certain asset, predicting an increase of its value in the future. This kind of investments is very similar to individual investing in many respects; depending on the nature of the investment, funds can be more or less risky, longer or shorter.
So why do investors choose funds instead of multiplying their capital all by themselves? Most of all, an investment fund gives you the possibility to invest in an asset which is more expensive than what a single entrepreneur could afford. Big capital is always an advantage, because it gives more investment options. Also, this form of investing is considered to be one of the most flexible; most funds can be joined at any time, and afterwards investment units can be also resold freely.
Due to their strong regulatory features, investment funds should also have no hidden costs and all the information about commission and handling fees is usually provided in a transparent manner – even for someone who never invested their savings before.
What is the investment area criterion of investment funds?
Each fund has a specified investment area criterion. It means no more, no less than the kind of market the fund is planning to invest in.
So there are funds whose investment area is e.g. shares of foreign companies. Other funds can be based on the real estate or raw materials and precious metals. There exist funds which are active on the alternative markets.
As you can judge by the abovementioned examples, investment areas can be very wide and vary depending on the chosen fund. It is probably not necessary to highlight that investing in real estate differs significantly from allocating one’s capital in the foreign exchange market. In other words, the collective term “investment fund” informs only about the way of investing (allocating the capital collectively); it does not give any information about the type of investment.
As the area criterion is so wide, and then there is also the question of the duration and the objective of a fund, it can be safely said that there are no two identical investment funds and the risk related to investing varies significantly depending on the strategy chosen. There exist stable funds, which are supposed to secure one’s capital; and there exist aggresive funds, which constitue a risk, but offer up to +35% return of investment per year.
Methods determining the return of investment from funds
There are at least a few methods used to calculate the return of investment from investment funds. However, the most popular one is the benchmark method. It consists in comparing the results to the scheme which is usually defined in the fund policy statement. According to this method, defined participation units change their value in time. Such units can be sold by the investor after their value will have increased.
Other methods include comparing to an external scheme (it can be e.g. a specified index) or receiving a dividend from time to time; on the total profit or a part of the profit realized by the fund in the given period.
How to invest in investment funds – rules of investing
As in the case of most forms of investing, diversifying the capital is a good rule to follow. Dividing the capital between several different funds will also minimize the risk related to investing.
Before investing in a fund, you should also define your investment goal (securing the capital, multiplying the capital), the duration of the investment and, what’s most important, the tolerable investment risk level. If you invest in funds online, you might also have to cover additional costs related to commission or handling fees for the agent (usually a bank or a brokage house). They should also be taken into consideration when looking for the optimal investment fund.
The idea behind investment funds
As mentioned before, the main idea behind investment funds is creating common capital, which consists of deposits of many participants. Such a solution helps to invest in the markets which would be inaccessible for an individual not having enough money at their disposal to e.g. buy a property, a big amount of raw materials or shares of a given foreign company. In other words, an investment fund offers more investment opportunities. In many cases, it can also secure some part of the assets of a given entity (e.g. an enterprise) in order to avoid a long-term loss of a part of the capital, e.g. because of inflation.
Investment funds are a good solution for those entrepreneurs and investors who want to try their luck on the markets which require big capital at entry. Less risky funds are also a more transparent and less demanding way of investing for people who wish to secure a part of their resources.
In a wider context, it is hard to say clearly whether funds are a better or a worse solution than individual investments. However, the less risky funds are definitely a good place to start for someone who never had anything do with investing.