Investment funds declare in the statute and often also in the name in which financial instruments they will invest. The choice of instruments will affect the potential profit that the fund will have a chance to generate, and the risk that will be associated with investing in this fund. What is mutual fund?
Before choosing a fund
The investor should therefore:
- Learn the fund’s policy (in which instruments it invests)
- Examine your profit / risk profile (e.g. by completing a simple survey What investor you are)
- Match the fund or portfolio of funds that suits you best.
- The most general criterion for the contents of the portfolio, divides the funds into 4 groups:
- Cash (invest mainly in money market securities, expected profit and limited risk),
- Debt (they invest mainly in bonds, expected profit and risk higher than in cash),
- Mixed (they invest in both shares and bonds, profit and risk usually higher than in bonds),
- Equities (most of the portfolio is shares, the highest expected profit and risk).
Mutual funds and their types
A mutual fund is a pool of money that comes from individual investors, companies and other organizations. The fund manager is a person employed to invest cash, which investors have brought, and the purpose of the fund depends on its type. For example, a fund manager with a stable growth would seek to ensure the highest return with the lowest risk. Instead, a mixed fund manager should try to outperform the results of, for example, the WIG index or other global indexes. However, the truth is that very few funds actually achieve this.
Mutual funds are divided into two categories:
- closed-end funds
- open-ended funds
Open investment funds
There is a variable number of participants and the previously valued participation units (JI) described above. The basic factor characterizing this type of fund is the possibility of selling an unlimited number of units (you can buy them at any time), which makes it available to an unlimited number of investors. In addition, the fund is required to repurchase investment units at any time at the participant’s request. Therefore, for investors the most important is the fact that if he owns units of a given FIO and decides to complete the investment, he may at any time demand their redemption in whole or in part. Open fund units are not formally securities, which means that we cannot sell them to another person.
This type of fund has a certain number of shares issued. They are issued by means of an initial public offering. These shares are traded on the open market, which, combined with the fact that a closed fund does not buy or issue new shares (like a regular mutual fund) makes the fund’s shares dependent on the law of supply and demand. As a result, closed-ended fund shares are usually sold at a discount to the net asset value.
They are similar to open-ended funds because their assets are invested in a wide range of securities. The main difference is that closed-end funds behave more like shares. Here, market value is driven by supply and demand.