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An investment fund, often known as a collective investment scheme (CIS). It is a method of pooling money from investors and using it to fund an investment according to the fund’s investment objective. In different countries, investment funds are also called by different names, such as; unit investment trust, unit trust, collective investment vehicle, mutual funds, or simply funds. Depending on the country where the fund is issued, there may be legal distinctions between these appellations.
In Indonesia, Malaysia, Taiwan, and South Africa, people call funds as unit trusts. A fund manager will invest the money in allowed investments on behalf of the fund company. Furthermore, the fund aims to invest in a variety of securities, including stocks and bonds and other assets such as real estate. To reduce risk, the fund manager employs a diverse investment approach.
How Investment Funds Work
A manager can opt to invest in equities, bonds, or hybrids based on the investors’ requests. For example, in the United States, there are mutual fund stock indexes that include numerous stocks from the US stock index. The fund managers use the Standard & Poor’s (S&P) Index as a benchmark.
We have the option of investing such funds in government bonds, emerging market stocks, money market instruments, or hybrids (combination). Because each index has a benchmark, we may compare the portfolio to the index to see if it beats the index.
As each index has a benchmark, we may compare the portfolio to the index to see if it exceeds the index. The goal is to get a return that is as close to the index as possible.
Before deciding on the proper sorts of stocks, the manager must first obtain a market survey and then continue to monitor the performance of the selected candidate stocks. For example, the fund manager selects companies A, B, C, and D. If the company pays the dividend, then it will be distributed to the investors. Moreover, the diversification strategy helps the fund manager manage the risk because the price of each share is subject to change. For example, if firm A’s stock price rises while company B’s falls, the manager still can make a profit.
Furthermore, NAV (net asset value) is a calculation that considers all of the stock values in the portfolio. It is the price of a mutual fund at the end of the trading day. For example, if the NAV is $1 and it rises to $1.01 (10%) on a particular day, our $1,000 investment will now be worth $1,100. The investors do not lose money until they sell it. The manager’s job is to invest the funds in the best portfolio for the best return
Advantages of investment fund
Investing in an investment fund is suitable for beginner investors who have limited time and knowledge about the market. Investment fund offers the investor some advantages including:
- diversification,
- lower risk,
- liquid investment,
- professional management with advantage of lower cost,
- ease of transaction,
- and enable small investors to become part of business
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