Funds: The bread and butter of investments

There are several reasons to include funds in a prospective portfolio of otherwise traditional investments. One of the major reasons cited for including a variety of funds is their ability to mitigate risk and add to a well-rounded, diversified portfolio. To this end, professional investors tend to include a mixed approach, balancing out high-risk-high-reward strategies with lower risk positions for a more sustainable return on invest ents.

However, prior to delving into portfolio enhancement strategies, those interested in the investment world must first familiarise themselves with the fundamentals.

What is a fund?

By definition, a fund is a sum of money belonging to several investors intended for a particular collective purpose. In the context of financial investments, this pool of money raised by investors is managed by a fund manager, where it is invested in a specific asset class or diversified over various assets. The goal is to provide investors with a steady flow of income or capital gains over a given period of time.

In this regard, investment funds can be offered to the general public as open-end (mutual funds) or closed-end funds. Open-end funds allow investors to buy and sell shares directly from the management company, in which the company would issue new shares of the fund. On the other hand, a closed-end fund is typically directed by the management company, which would raise a sum of money by issuing shares in an initial public offering. This would in turn be traded on an online exchange or over-the-counter platform. Naturally, interested investors who want to buy or sell shares would do so through the exchange on a secondary market.

Should the investment strategy prove fruitful, the capital raised by the fund manager can then be used to invest in any type of asset. Often enough, investors are fronted with a selection of funds. The reason for this variety is due to the underlying asset, which determines the type of fund; i.e. Equity and Bond funds, money market funds, balanced funds and index funds to name a few.

Why invest in funds?

As previously alluded to, investment funds have an array of advantages for investors with limited financial knowledge and capital. One of the more obvious advantages is that the investor’s capital is managed by a professional money manager, where each investment undertaken by the fund is carefully and meticulously researched and chosen depending on the risk appetite of the fund.

Another more cited advantage offered by funds is asset diversification, which is a crucial point every investor worth his salt will stand behind. Indeed, a healthy investment portfolio is normally comprised of different asset classes in various sectors and industries. However, this can be challenging when done using limited capital due to share denominations. For example, a relatively small capital of €2,000 would need to be invested in cheaper stock in order to achieve portfolio diversification. Regardless of an investor’s original capital, however, money placed within a fund would essentially represent a share of all the underlying assets of the fund, irrespective of their individual prices.

On the flip side of the equation, investors who allocate sizeable capital into funds often benefit from reduced transaction costs and liquidity.

All in all, funds offer various advantages and are a great way to diversify your investment portfolio. As with all types of investments, it is important that before investing, proper research is made when selecting the next fund to add to your portfolio.

This article, which was compiled by Zenith Finance Ltd., does not intend to give investment advice and the contents therein should not be construed as such. Zenith Finance Ltd is licensed to conduct investment services by the MFSA. For further information contact Zenith Finance Ltd on 21332200 or by email to info@zenithgroup.mt