6 Types of Investment Fund
An investment fund is a pool of capital that a number of individual investors pay into, which is used to collectively invest in stocks and bonds. Here are the 6 main types of investment funds available in the market.
A mutual fund is a pooled investment portfolio where investors invest by buying a unit in a fund. The money later will be invested by portfolio managers. The funds hold individual stocks (equities fund), or bonds (bond fund).
Unlike stocks, mutual funds do not trade throughout the day to avoid allowing people to take advantage of the underlying change in the net asset value. Instead, buy and sell orders are collected throughout the day, and once the markets have closed, they are executed based upon the final calculated value for that trading day.
Exchange-Traded Funds (ETF)
Exchange-traded funds (ETFs) characteristics are very similar to mutual funds just with a little variation in both funds. An ETF provider considers the universe of assets, including stocks, bonds, commodities or currencies, and creates a basket of them, with a unique ticker. Investors can buy a share of that basket, just like buying shares of a company. Buyers and sellers trade the ETF throughout the day on an exchange, much like a stock.
ETF’s share price changes daily throughout the trading day as the shares are traded for buy and sell on the stock exchange. This is what differentiates ETFs compared to mutual funds, which are not traded on an exchange, and trade only once per day after the markets close.
The strongest attraction of ETF is transparency. Anyone with access to the internet can search for the price activity for a particular ETF on an exchange. In addition, daily fund holding will be disclosed to the public whereas on the other hand, only happen quarterly for mutual funds.
This transparency allows you to keep peace of mind about what you’re invested in.
An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
Index funds have lower fees than actively managed funds. Index funds follow a passive investment strategy. Index funds seek to match the risk and return of the market based on the theory that in the long term, the market will outperform any single investment.
Unlike investing in equities that performance depends on the company that is invested in. In an index fund, the performance of the index depends on the performance of every company that makes the market.
Index fund investing is an example of “passive” investing, as there are no fund managers actively trying to “beat” the market. The funds are simply designed to mirror the returns of an index. As a result, they usually have low expense ratios, making them cost-effective investments. The simplicity and low cost of index funds make these funds optimal investments for people who do not want to spend a lot of time researching stocks and managing their portfolios. In fact, many financial advisors recommend index funds as a core component of investment portfolios.
A trust fund is a special type of legal entity that allows a person or organization to hold assets they will eventually give to another. For example, a grandparent could hold $100,000 in stock for a grandchild, with the stipulation the grandchild receives the money when they reach the age of 18. Trust funds offer tremendous asset protection benefits and, at times, tax benefits. Trust funds can hold almost any asset imaginable from stocks, bonds, and real estate to mutual funds, hedge funds, and art.
Real Estate Investment Trusts (REITs)
Some investors prefer to buy real estate through real estate investment trusts (REITs). They trade as if they are stocks and have special tax treatment. REITs allow you to invest in real estate without having to buy or maintain actual buildings or land. There are different types of REITs that specialize in various types of real estate. For example, if you wanted to invest in hotel properties, you could consider investing in a hotel REIT.
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