Get Started With Investment Funds

I nvesting in the stock market is risky, but the return can be well worth it. If you’re looking to invest in something a little less risky but that still gives you a decent chance of a return, then an investment fund might be for you. Learn more about the types of investment funds, their benefits, and how to get started investing in them.

Key Takeaways:

  • Investment funds are securities purchased by a group of investors that are overseen by a fund manager.
  • Open-end funds have no supply and demand, keeping things pretty even keel. Closed-end funds have supply and demand and mimic stocks.
  • Investment funds include mutual funds, exchange-traded funds, money market funds, and hedge funds.
  • Benefits of investment funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing.
  • Investment funds can spread your investments among high, medium, and low-risk companies, resulting in less risk over an extended period of time.

What Are Investment Funds?

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Investment funds can be described as pooling your money with other investors to purchase securities collectively. Even though you’re investing as a group, each investor retains ownership and control over their shares. However, as the fund grows and makes a profit, each individual does not have a say in how those funds are invested.

An investor can choose a fund based on risk, goals, fees, and other factors. From there, a fund manager will oversee the rest of the decision-making process. The fund manager will determine which securities to hold and in what quantities. The fund manager will also decide when securities should be bought and sold.

Investment funds are the most popular investment choice in the United States.

Open-End Funds Vs. Closed-End Funds

You have some options when it comes to investment funds. The safer and most popular is the open-end fund. An open-end fund issues new shares as more money is added to the pool. As investors redeem shares, the shares will retire. There’s no supply and demand, resulting in a direct reflection of the underlying asset. Open-end funds do not keep producing more shares. These funds are typically priced at the end of the trading day.

Closed-end funds are more reflective of stocks. These have supply and demand, meaning there’s a fixed number of shares to buy and trade on. This can result in closed-end funds trading at a premium or a discount to its net asset value.

Types of Investment Funds

There are several different types of investment funds for consideration. They include:

  • Mutual funds:Mutual funds are pools of money by investors that buy equities and other securities. Mutual funds are typically on a lower scale as far as investment funds are concerned. You can either passively or actively manage mutual funds.
  • Exchange-traded funds (ETFs): These investment funds were developed as an alternative to mutual funds because traders were looking for more flexibility with their investment funds. ETFs trade on exchanges and are priced and available for trading throughout the day. This is similar to closed-end funds. An advantage of ETFs is that they have a slightly lower expense ratio when compared to mutual funds. ETFs are a rapidly increasing fund option.
  • Money markets: Money markets have a high degree of safety with relatively low rates of return. These funds trade in very short-term debt investments. Banks can open money market accounts, and an individual investor can purchase money market funds at the retail level. On a wholesale level, money markets involve large-volume trades between institutions and traders. Most money market transactions are completed this way.
  • Hedge funds: These funds are quite different from mutual funds and ETFs. They are available to accredited investors and are actively managed. Hedge funds have fewer federal regulations, resulting in the ability to invest in a variety of asset classes. Hedge funds tend to be a little riskier than ETFs and mutual funds.

Which fund is best for you will depend on what your financial goals are, the time period you plan to invest the funds, and the activity level you desire.

Benefits of Investment Funds

If you’re just getting into the stock market, it might be wise to place some of your money into investment funds. With investment funds, your money is managed professionally. This takes out all of the work on your end. Fund managers complete the research, buy and sell the securities, monitor the securities, and reinvest for you.

If you’re the type of person who likes to take a risk but have a safety net in place, investment funds can do just that. Investment funds allow you to split up your investments into many different companies. This provides a sense of security since you know that if a company fails you have other companies to rely on in your portfolio. Investment funds don’t require a large sum of money to get started or for subsequent investments. If you’re looking to start small, investment funds allow just that. They also enable you to cash in your shares at any time.

There are a variety of benefits to investment funds. Some of these advantages include:

  • Advanced portfolio management: For a small fee, a professional portfolio manager will manage your investments, including buying and selling stocks and bonds.
  • Dividend reinvestment: As your securities grow and you accumulate interest income, you can purchase more shares in the funds.
  • Risk reduction: Most investment funds will invest in 50 to 200 different securities, thus reducing risk by diversifying your portfolio.
  • Convenience and fair pricing: Investment funds are easy to buy and easy to understand. They also are only traded once per day at the closing net asset values, which alleviates the stress of price fluctuations throughout the day.

How To Get Started With Investment Funds

Getting started with investment funds is relatively simple. Try using these steps:

  1. Decide whether you want to invest actively or passively. You can choose to have a professional actively manage your investments to beat the market, however, since a person is involved, this option tends to have higher fees. Passively managed accounts are on the rise. These funds are cheaper to purchase, and there are fewer fees. This approach is less hands-on, but both methods show similar results.
  2. Determine how much money you’re able to invest. The money you choose to invest should be untouched for at least five years. This will allow for your investments to ride out any storms that may arise. Once you have your budget in mind, determining how much risk you want to take is the next thing to consider. Your age and how close you are to retirement can help you determine how risky you should be.
  3. Open a brokerage account. If your place of employment offers a 401(k) or other employer-sponsored retirement, chances are you have already invested in an investment fund. If that’s the case, you could purchase additional funds through these companies. However, they may not have as many options. You could also buy from an online broker. This will give you a more comprehensive range of options. Some things to consider when taking this route are affordability, fund options, knowing what educational and research tools the company offers, and how easy the use of their website or app is.
  4. Look at the fees. This goes back to the first consideration of whether you want to invest in an active or passive account. Both types will have fees associated with them, but actively managed accounts have higher fees. Ensuring you understand the fees involved will help you keep your profits at the highest possible return. Some brokerages offer no-transaction-fees mutual funds. These could be a good starting point. However, the return on these investments is not always as high.
  5. Start to invest. Building and managing your investment portfolio is essential. Have goals in mind and stick with them. Having your portfolio examined and rebalanced every year will help keep your portfolio in check.

Investment funds are popular in the United States. They provide an outlet for people wanting to invest their money by using a more secure method. Investment funds also allow people the opportunity to dabble in the stock market without having to put forth a lot of money to start. By pooling your money with other investors and having the advantage of someone monitoring your investments for you, it’s well worth the small fee.