September 24, 2019
2 min read
Investment and Life insurance
Nicholas Flaherty, Investment Strategist at FWU Invest S.A.
When starting to invest, you have likely come across the term ‘fund’. There are many different types and it may be a little confusing as to what they all do. So let’s take a look at what exactly a fund is and how they can be useful to you.
In basic terms, a fund is just a pool of money, which can be set up for any purpose, be that for a university, charity or sports team. But for our purposes, we are interested in a fund – a pool of money – that is set up for investment purposes, in other words to see that pool of money grow larger. This type of fund is referred to as a ‘mutual fund’ and is managed by professionals to ensure that the money inside it grows in accordance with the goals of the fund. So, the idea is to bring together money from numerous investors under one umbrella and have a manager then invest it on their behalf.
Mutual funds come in many different shapes and sizes. For example, you can find funds that only invest in American stocks or only in German stocks, while there also funds that have a ‘global’ mandate, meaning their goal is to invest globally, so even in far-flung places such as China. Funds are also not just limited to stocks: there are also many funds that invest in bonds, again, in many different ways. They could invest in ‘safe’ government bonds or in riskier areas of the bond market such as in Emerging Markets or in an area called ‘high yield’, which is where you can find the debt of companies that do not have a good credit rating, but in return pay a handsome interest. A fund could also combine all of these assets in one, which is then usually referred to as a ‘mixed’ fund. The point, then, is that almost the entire investment universe is at your disposal via funds.
Very simply, if you are a relatively small investor, funds offer you the opportunity to very easily achieve diversification without having to buy all the various assets yourself. On top, they offer you the opportunity to access professional management of your funds, necessary if you have neither the time nor the inclination to find the right investments yourself.
In sum, funds are pools of money, whereby many investors get together and use a manager to select the best portfolio for their investment objective. Especially for the smaller investor, they offer a very useful core to a portfolio.