What Is an Investment Fund
An investment fund is an offering of capital belonging to several investors who are collectively used to purchase securities while each investor retains ownership and control of his or her own shares. An investment fund offers a wider range of investment opportunities, greater management experience, and lower investment fees than investors might be able to obtain on their own. Types of mutual funds include mutual funds, exchange-traded funds, money market funds, and hedge funds.
Breaking-down the investment fund
With mutual funds, individual investors do not make decisions about how to invest the fund’s assets. They simply choose a fund based on its goals, risks, fees, and other factors. The fund manager oversees the fund and decides which securities to hold, in what quantities and when the securities to be bought and sold. An investment fund can be extensive, like an index fund that tracks the S&P 500, or it can be highly focused, like an ETF that only invests in small technology stocks.
While mutual funds in various forms have been around for many years, the Massachusetts Investors Trust is generally considered the first open-ended mutual fund in the industry. The fund, which invests in a mix of large-cap stocks, began in 1924.
Open end vs Closed end
The majority of mutual fund assets belong to open-ended mutual funds. These funds issue new shares as investors add money to the pool, and withdraw shares as investors redeem them. These funds are usually priced only once at the end of the trading day.
Closed funds trade more similar to stocks than open funds. Closed funds are managed investment funds that issue a fixed number of shares and trade on an exchange. While the net asset value (NAV) of the fund is calculated, the fund is traded based on investor supply and demand. Therefore, a closed-end fund may trade at a premium or at a discount to its NAV.
Emergence of ETFs
Exchange-traded funds (ETFs) have emerged as an alternative to mutual funds for traders who want more flexibility with their mutual funds. Similar to closed-end funds, ETFs are traded on exchanges, priced and available for trading throughout the business day. Many mutual funds, such as the Vanguard 500 Index Fund, have ETF counterparts. The Vanguard S&P 500 ETF is essentially the same fund, but bought and sold during the day. ETFs often have the added advantage of slightly lower expense ratios than their equivalent mutual funds.