Funds is the backbone of finance and depicts a way of managing the funds with an aim of growing the amount of money that investors have planned to invest. Many people or companies choose to invest in funds as they can act as a means of diversification, risk management and financial goal achievement. The investment strategy also involves differences depending on the kind of fund which distinguishes between normal and high-risk funds according to the investor’s preferences.
This article discusses the various types of funds, the 4 categories of investment fund and mines the role and benefits of each type.
“Funds refer to money collected collectively from investors or institutions for the attainment of a given objective, like to gain a specific rate of return, promote a given cause, or fund a given project.”
These funds are normally run by individuals who deliberately invest them in different assets for example stocks, bonds or properties for optimum returns given a certain level of risk.
The goal of funding is to direct money towards a particular goal that can be business profit, company’s development, or social improvement. Money makes it possible to start up activities, do research and development and also allows one to build up capital for use in the future. For instance, a company may require capital for expansion purposes, while an individual looks for an investment in a fund for security.
This information assists the investors in selecting the most appropriate kind of funds supported by their objectives, intolerances to risks, and financial information. Below are types of funds:
Our primary equity funds deal mainly with stocks with an objective to achieve capital appreciation through investing in the stock market. These funds have higher risk levels in regard to their investment, but they are expected to generate higher returns in the long run, thus attractive for those investors who are willing to put in terms of risk. Through constant diversification across different stocks, equity funds minimise specific stock risks, even though they are responsive to the overall market volatility. Investors go for equity funds when they want the total value of their investment to grow through capital appreciation on stocks in the market.
Debt funds invest in fixed-earning securities including state securities, bonds, treasury bills and companys’ debt. These are relatively less risky compared to equity funds, which is an added advantage to any group or individual who wants to invest in relatively safe and steady income. While returns earned on the debt funds are relatively low, they are more predictable because they are less volatile to market fluctuations. As mentioned, debt funds offer less risk and hence a predictable income thus preferred by investors who need high capital preservation as compared to high returns.
Money market funds invest in temporary and safe financial products, like certificates of deposit (CDs), government bonds and commercial papers. These funds are very safe, experience low volatility, and provide little returns but ensure lots of liquidity making them proper for holding emergency funds or maintaining the value of your cash. Money market funds are very liquid as investors can withdraw without minimal problems. Therefore, they are preferred by investors who seek a relatively safe setting to place their money and get minimal yield.
Balanced funds, which are also called hybrid funds, fund in both equity and debt securities with proper proportionate. These finances work to achieve a moderate level of growth because of the diversification of the assets involved and provide both regular income and realization of capital. Balanced funds are mainly appropriate for investors who want to strike a balance between low risks and slightly higher profits than that of a fully invested stock fund. They are ideal for a client who wants to diversify growth without necessarily being associated with the high risks of equity funds.
The 4 kinds of investment funds are classified under the categories of the investment strategy, objectives, and risks they possess. Below is a breakdown of these categories:
In open-end funds, it is possible to purchase and sell shares directly from the fund without any fixed number. They are sold at the current net asset value (NAV), which is its asset value. Due to this flexibility open-end funds have a tendency of being perceived to be answering the needs for liquidity by investors.
Closed-end funds have a finite figure of shares outstanding, and their shares are exchanged on the stock market like individual stocks. Market prices can be different from the NAV due to demand and supply. It presents chances of price appreciation to the investors, although it compels risk.
As a class of investments, ETFs are finances that are traded on share markets and therefore actively traded throughout the course of the trading day. They are generally less costly as they have low expense ratios. These funds are the blend of the diversification of mutual funds and flexibility of stocks.
UITs are expected to have a fixed structure and limited lifetime after which they are dissolved. They provide stable returns since they do not engage in the buying and selling of their stocks. UITs are most appropriate for investors who want stable investments or those that have a fixed investment period.
All of these fund types have their respective benefits and depend on the investor’s choice and investment goals.
Investing provides various advantages in funding, including:
Diversification: Funds dispense investments in several assets, hence minimising threats.
Professional Management: Fund managers increase the probability of good returns from the selected assets through proper management.
Liquidity: Most funds, especially the open-end investment funds have been characterised by high liquidity in terms of investors’ ability to redeem their investments.
Affordability: Funds let investors begin with little amounts of money thus making it easy for a large number of people.
Knowledge of different types of funds and potential funding sources is an essential condition to make rational financial choices, in tune with the goals and risk tolerance. Many individuals get professional management and diversification through funds and many businesses can explore different funding to enable them to expand. When selecting the right kind of fund type or funding strategy, investors and organisations can create a great foundation for their monetary chances in the future.
For further improved understanding of fund types, investment strategies, and risks, enroll in the Course of Investment Funds Classification and their Evaluation Methods from the British Academy of Training and Development.