Different Kind of Investment Funds Explained
Investment fund is the investment of money for profit. An investment fund is a financial investment vehicle, which is aimed at private investors – little or large-or institutional investors-insurance companies, banks – and offers the following five key advantages over direct investment in shares, bonds and property:
1. Risk is spread and hence reduced.
2. Funds allow you to tap into professional, expert and full time investment management expertise.
3. Funds are cost effective.
4. Funds offer access to markets that may otherwise be closed or too technical for retail/individual investors.
5. Funds benefit from institutional safety, which means they are heavily regulated and supervised.
The benefits of investment funds, where individuals from all walks of life pool their savings together, can be summed up as offering everybody – from professional or institutional investors to people with limited time, or limited investment skills or modest means – access to investment returns otherwise only available to more sophisticated investors, who are able to buy their own professional portfolio management advice.
Investment funds generally entail less risk than direct holdings of securities, and offer economies of scale. It is a firm that invests the pooled funds of retail investors for a fee.
Information on the product you, as an investor, are contemplating buying is crucial.
Usually, all vital information must be included in an investment fund’s prospectus. However, prospectuses have become increasingly complex and difficult to understand, thus discouraging investors from reading them.
Investment funds are suitable for anyone who:
1. Is planning to invest in the capital markets but does not want the risks or costs associated with direct investment in equities or bonds.
2. Already has enough money to cover their everyday spending needs and has some spare cash.
3. Can accept possible temporary falls in the value of their investment.
Investment funds should be considered as a long-term savings product. Investments should be held for at least three to five years, preferably longer. In fact, the longer the time scale, the greater the potential to make money grow.
Investment funds can be classified according to their investment objectives.
1. Money Market Funds
Money market funds invest a sizeable portion of the fund’s portfolio in short-term bonds and/or money market instruments (such as certificates of deposit, commercial paper, treasury bills,).
2. Bond Funds
Bond funds invest in fixed interest rate securities as a sizeable portion of the fund’s portfolio. These funds generally have a global average maturity of more than one year and its investments can consist of different instruments with very different quality ratings.
3. Equity Funds
Equity funds invest in the stock market at a significant portion of the fund’s portfolio. These funds are frequently also called stock funds.
4. Balanced Funds
Balanced funds spread their portfolio over the three main classes described above.
For more details please visit www.wealthcapfund.com
Mark Plummer
http://www.articlesbase.com/investing-articles/different-kind-of-investment-funds-explained-135383.html
4 Responses to “Different Kind of Investment Funds Explained”
This is what I have so far but i need help with choosing the 5 mutual funds Can anyone help me out?
Cliff Swatner is single, 33, and owns a condominium in New York City worth $250,000. Cliff is an attorney and doing well financially. His income last year exceeded $90,000, and he has sufficient liquid assets to supplement his condominium and other tangible assets. Several years ago, Cliff began investing in stocks and bonds. He made his selections on the basis of articles he read describing good investment opportunities. Some have worked well for Cliff, but others have not. Cliff has never taken the time to evaluate his portfolio performance, but he feels it isn’t very good. Cliff currently has about $90,000 invested. He has been dating a woman lately and hopes to marry her in three years, at which time he will need $20,000 for marriage expenses and a honeymoon. Cliff’s only other objective is to accumulate funds for retirement, but he does not have a specific dollar target for this goal. Cliff feels that he has a moderate risk-tolerance level. 1. Explain some disadvantages of Cliff’s current investment approach. 2. Construct a portfolio for Cliff, limiting your selections to 5 mutual funds (assume that he sells his current stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component. Make sure your plan also explains your selections for each portfolio component. Visit an investment firm that deals in mutual funds, such as, Vanguard.com, AmericanCentury.com, Fidelity.com, etc. and select 5 mutual funds that will diversify Cliff’s portfolio. Record the fund name, ticker symbol, 5 year average annual returns (can use 3 year if 5 year is unavailable), the amount to be invested in each fund, and the amount returned in 3 years using the 5 years average annual return for the wedding. 3. Explain how Cliff should periodically rebalance his portfolio, indicating how frequently re balancing should be done.
This is what I have so far but i need help with choosing the 5 mutual funds Can anyone help me out?
Some disadvantages of Cliff’s current investment approach are that he has not kept track of his investments. Having made the investments Cliff should have kept track of them. He should hold on to the investments that are doing well and sell the ones that are not. Investing without any specific targets or goals, doesn’t help when he is trying to accumulate funds for retirement.
Different investments have different risk and should be kept in mind while investing. He has no dollar amount as a target, while investing it is important to have the dollar amount that he wishes to acquire. Based on these and the expected returns, a monthly allotment can be made. Without the target, it is difficult to put aside any amount of money. His portfolio should if possible be a diversified portfolio so that the instability in returns is reduced. This means that he should include some low risk securities such as Treasury Bills.
Advantages of Mutual Funds: Professional Management – The primary advantage of mutual funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
Diversification – By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you. Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn’t be possible for an investor to build this kind of a portfolio with a small amount of money.
Economies of Scale – Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay. Liquidity – Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time. Simplicity – Buying a mutual fund is easy.
Cliff can invest the $90,000 as follows:
Asset HoldingsAmountProportion
Growth stocks$27,00030%
International stocks$18,00020%
High quality bonds$22,50025%
Zero coupon bonds$13,50015%
3 to 5-year CDs$ 9,00010%
Total$90,000100%
Rebalancing the portfolio means moving from risky assets to safer assets as you time passes. The logic behind that is that an investor would not like to lose capital as he grows older, since the sources of income would be limited. As people approach retirement, they tend to become more risk averse. Their investment strategy also tends to emphasize capital preservation. This increased conservatism is a very normal response. However, this shift in risk tolerance requires tha
Comment made on April 3rd, 2010 at 6:10 pmVPCCX
Comment made on April 3rd, 2010 at 11:12 pmDODWX
FAIRX
PTTRX
NEWFX
References :
Sounds like Cliff needs help selecting mutual funds.
Comment made on April 3rd, 2010 at 11:14 pmReferences :
http://hubpages.com/hub/bestmutualfunds
http://hubpages.com/hub/highbond
Don’t forget to set aside $20K (or an amt that will grow to $20K) for Cliff’s wedding in 3 years – that’s short-term money, and should be kept in "safe" investments. Also (I don’t know if your prof cares about this), Cliff should have an emergency fund equivalent to 6 months’ living expenses – this should also be kept in safe investments.
For retirement, I would allocate as follows:
VFINX – 30%
FDIVX – 20%
FSLCX – 15%
FSICX – 20%
TRREX – 15%
I hope that helps. Good luck!
Comment made on April 3rd, 2010 at 11:16 pmReferences :
Former stock broker, MBA in Finance, 20+ years investing experience.
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