What are investment funds, and how do they work?

Tendersetter

9:30 am

16 May 2019

Investment funds are an easy and relatively safe way for investors to give their money to specialised players who will invest it for them in the financial markets. To minimise the risks, the money is held by a custodian bank. If the investment fund does not perform well, the cumulative losses will be debited in proportion to the amount invested.

A closer look at investment funds

An investment fund is a pool of money belonging to a large number of individual investors. The money can be invested in securities such as government bonds, corporate bonds, equities, etc. 

Participants in a fund, also known as fund holders, who buy units in the fund, participate proportionally in the fund’s gains or losses. Investment funds are initiated and managed by investment management companies. In Italy, they are called SGR and are listed on a specific register.

The securities purchased by a fund are held by a custodian bank, which will also verify the legitimacy and compliance of the activities carried out.

Advantages of investment funds

  • They enable you to benefit from the particular expertise of the fund manager;
  • Your money is pooled with that of thousands of other investors, giving you access to investment opportunities that would not normally be available to individual investors;
  • Risk diversification: the investment is not overly dependent on the performance of a particular company, as the fund invests in different asset classes, which helps to spread the risk of the investment.

If you invest in the shares of a small number of companies, your investment will be 100% linked to their fortunes. On the other hand, if you invest in a fund, your money will be invested in hundreds of companies, helping to create a diversified portfolio, and your investment will be less dependent on the success or failure of any one company.

The various categories of investment fund

Investment funds are categorised according to the types of financial instrument they invest in.

Equity funds

Equity funds are investment funds that invest in the stock market. Putting your money in an equity fund significantly reduces the risks related to investing in the stock market as an individual. A wide range of stocks will be selected by the fund manager in order to reduce the fund’s dependence on the performance of a single company.

Fund managers use all their professionalism and experience to choose the stocks with the highest potential for gains. For example, the Tendercapital Secular Euro fund has a portfolio that is carefully constructed on a step-by-step basis, using a rigorous top-down analysis based on future demographic trends and socio-economic-healthcare developments. (To find out more about the Tendercapital Secular Euro fund, click here).

Most equity funds fall into one of the following categories:

  • Growth funds, which target long-term capital growth. The fund manager will select companies whose share price is expected to rise the most.
  • Income funds, which aim to generate attractive income for investors. The fund manager will select companies that pay regular dividends and whose share price tends to be less volatile compared to other companies.

Bond funds

Investing part of your portfolio in bond funds can be a good way to obtain greater diversification and stability. Bond fund categories vary depending on the type of bonds in which they invest: government bonds/corporate bonds; short-maturity bonds/longer-term bonds; bonds issued in developed countries/emerging country bonds. 

Bonds are loans made by the bondholders to companies (corporate bonds) or governments (government bonds), which issue them in order to raise capital. The principal is repaid to bondholders (at the end of a pre-determined period), who also receive interest on the sum invested.

Investing in the bond market is an excellent way of diversifying your investments, especially if you choose a bond fund. Tendercapital Bond Two Steps is one example of a bond fund, among many others. (To find out more about the Tendercapital Bond Two Steps fund, click here).

Balanced and asset allocation funds

There are two types of balanced fund:

  • Traditional balanced funds, which have a static portfolio comprising equities, bonds and cash;
  • Asset allocation funds (also known as the new generation of balanced funds), which follow a dynamic asset allocation strategy whereby the fund’s composition is fine-tuned at regular intervals.

In addition, asset allocation funds use two other asset classes to broaden diversification and improve performance: real estate and commodities.

Money market funds

Money market funds invest in short-term money market instruments, and are used to invest any money that will be needed in a short space of time. These funds can offer higher interest rates than those available to individual investors.

Real estate funds

Real estate funds are the ideal solution for investing in the real estate market and spreading risk over a number of assets rather than buying a single property.

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