What are investment funds and their types and how they work?admin1 - October 7, 2021
In this post, we will learn about investment funds, their definition, types, working mechanisms, how they are managed, their advantages and disadvantages.
Investment is defined simply as the process of employing surplus funds in financial activities and businesses that will bring profit to the owner of the money instead of leaving it inactive, eroding over time and decreasing its value with inflation levels and other factors.
It is possible that the owner of the money is the one who invests it, and if he does not have experience, he hires those who invest it for him, who have experience in investing, such as financial intermediaries and financial institutions expert in this regard to obtain the best profit return, and investment funds are one of these tools through which funds are invested To obtain the profit and benefit for the owner of the money invested.
What are investment funds?
Investment funds are one of the many forms of investment tools in which capital is employed and they have many types that we will list here for you, but before this we need to know what an investment fund is in detail.
The investment fund is a huge financial pool whose money is invested in many fields according to its quality, such as various economic projects, production, service, agricultural, industrial, real estate, gold and securities such as stocks and bonds listed on the stock exchange, according to the type and scope of the fund as I mentioned and as it will be mentioned.
How is the fund managed?
These funds are managed by experts specialized in financial management and they conduct studies on the best investment fields that are consistent with the fund’s strategies and the main objective of them is to achieve the greatest benefit for the investors, especially that the fund’s financial pool is very huge because it is made up of a large group of investors with their money and not the money of an individual It collects the capital of a group of investors and manages them according to a specific investment strategy and objectives set by the fund manager to achieve investment advantages. The individual investor cannot achieve it alone, and this is one of the advantages of investing in the many funds, which we will talk about here also in detail.
How does an investment fund work?
The issuer of the funds issues the documents and collects the money from the investors after determining the price of the nominal value of the document contained in the fund’s subscription prospectus. Freely according to the price movement and the convictions of each investor, and the value of the fund depends on two returns: the percentage increase in the price of the document and the percentage of cash distribution to investors determined by the investment manager.
Types of investment funds
The types of funds differ according to the different types of investment tools on which the fund is based, and according to the areas of investment that it follows to achieve its goals Investors choose from them what corresponds to their investment objectives as well, and the types of these funds are as follows
1. Income funds
They are funds whose goal is to obtain income by investing primarily in shares of companies that have a good and distinguished history of dividend returns, and they are also known as periodic returns funds because they are interested in investing in instruments with fixed material returns that are distributed regularly such as bonds with regular periodic returns and limited losses.
2. Balanced funds
They are investment funds that combine stocks and bonds in their assets and allocate part of their investments to short-term financial instruments, and they are a type of investments that seek to achieve certain goals that include obtaining simple profits without entering into major risks and with moderate and limited growth in capital while preserving it from loss These funds are accepted by many investors who desire appropriate financial returns and simple risks.
3. capital funds
They are investment funds that specialize in trading stocks that increase in capital within a long period of time, which is what some investors who prefer long-term investments desire.
4. Islamic funds
It is investing in financial assets in accordance with the rules and provisions of Islamic Sharia and it is supervised by an Islamic financial committee specialized in Sharia provisions, and it is responsible for managing the fund so that the money is not invested in any prohibited companies or assets such as liquor or cigarette companies and that it adheres to the conditions of validity of sale and exchange, and follows Islamic rules In investment transactions and tools in general, all investment is Shariah-compliant
5. Index funds
This type invests in the field of stocks with volatility and higher risks, which is characterized by a clear rise in its index in the stock market, and there are investors who accept this type, as it is a type characterized by high profits with greater risks.
6. Impulse chests
They are capital growth funds and depend on investing in securities with high returns with a high risk ratio with the aim of achieving a large profit, and this type is suitable for the enterprising investor and large investors who can bear the great risks.
7. Money market funds
They are funds that invest in short-term investment tools, such as various savings certificates, with a period of up to three months only, and they are suitable for some categories of investors who want high financial liquidity all the time.
8. Specialized investment funds
From its name, it appears that it is actively investing capital in a specific sector such as oil, real estate, transportation or gold, and it is characterized by a high risk because it is greatly affected by the field in which it invests and the market changes it is exposed to.
This type of fund is suitable for some categories of investors wishing to invest in a particular sector with the expansion of high risk limits.
Tips and basics for choosing an investment fund
- The price of the investment unit in stocks and bonds of the fund and the increase or decrease in the size of the fund.
- The extent of the ability of those in charge of managing the fund to achieve profitability goals from the annual return. expected to invest and achieve its stated objectives.
- The amount of liquidity available in the fund and the extent of the investor’s ability to buy or sell at any time he wants any ability to liquidate money at any time or exit from the fund.
- The past performance of the fund and the qualifications of those in charge of its management, and this can be monitored by the historical management of the financial institution or the entity issuing the fund and the extent of its credibility.
Advantages of mutual funds
Investment funds are the best suitable way for small investors, considering that the fund contains many stocks, bonds or other investment tools that the individual may not be able to trade in on his own.
Take advantage of the professional and specialized management of professional financial managers and specialists in fund management.
Disadvantages of investment funds
The existence of a fixed tax rate calculated on the investor in the annual funds and on the value of the capital gains even if he did not achieve any significant profits during the year.