Understanding investment funds
What are investment funds?
Investment funds offer the ability to achieve diversification across a range of assets by simply investing into one fund. This fund, under the active management of a fund manager, pools together money from many investors to collectively invest in a selection of shares, bonds, cash or other financial instruments, ultimately providing a diversified investment.
Each investment fund has an objective outlining what it aims to achieve for its investors. This gives you the ability to choose funds that are appropriate to the level of risk you are prepared to take. The objectives can be found in the offering documents of each individual fund.
Types of investment funds
Funds investing a diversified portfolio of shares of different companies and industries. Depending on the investment strategy, some may only invest in large companies and some only in medium-to-small companies. There are also funds that will only invest in particular sectors.
In general terms bond funds invest in a diversified portfolio of fixed-interest securities, for example, Government bonds and corporate bonds. Funds that invest in Government bonds are generally considered to be less risky than funds invested in corporate bonds. However, return rates are not guaranteed and can still go down as well as up.
Balanced funds have the advantage of investing in a mixture of assets, including both shares and bonds. It is important to be aware of the split between shares and bonds in order to fully understand the risks and potential rewards inherent within a particular fund.
Specialist funds invest in a specific sector of the economy. Examples of sectors include: Health; Telecommunications; IT and Technology; Property and Natural Resources.
A truly diverse portfolio should take advantage of global diversification opportunities. Global funds offer a convenient solution to achieve a geographically diverse portfolio.
Emerging markets funds
An emerging market fund invests in developing countries that could potentially have very high economic growth. Examples are Brazil, India, Russia, Taiwan and China. The main risks, on the other hand, are political instability and volatile economic conditions. The financial markets in such countries can therefore fluctuate dramatically.