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Investment Fund

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A fund is an investment that pools together money from lots of individuals. The fund manager then invests the money in a wide range of assets overseas shares, bonds etc. Each investor is issued units, which represent a portion of the holdings of a fund

What’s an Investment Fund?

An investment fund is a financial vehicle (also known as a collective investment scheme or “CIS”) that pools money contributed by a group of individuals to invest in derivatives, fixed-income securities, shares and other financial instruments.

What benefits do investment funds offer?

If you’re retired or approaching retirement, you’ll probably be looking for something that can give you a regular income to cover day-to-day living expenses.

There’s a range of investments, including equities, bonds and property, that can provide you with regular income that’s often higher than the rate of inflation.

While savings accounts offer easy access and the security of guaranteed capital, the returns can be small. Investing in the stock market can provide stronger returns over the long-term, but with a higher level of risk.

In order for your savings to grow in real terms over time, they need to earn a rate of return after tax that’s greater than the rate of inflation.

With today’s low interest rates, it can be difficult to find a savings account that can give you a return above the current inflation rate. So it’s worth considering investments which have the potential to outperform inflation.

You or an Investment Manager can design your investment portfolio to achieve different goals as you go through life, e.g. you may prefer less risky options as you get older. With careful planning you can tailor your portfolio to reflect your changing goals and priorities.

If you plan on investing over a long time period, you may want to invest in funds that have growth potential, risky sectors such as emerging markets, or private equity where your savings can ride out short term market changes. If you’re approaching retirement, you may want to invest in more income-focused options.

How to invest in investment funds

Investing in investment funds involves several key players. First, there is the investor (which some investment schemes designate as “participant”, the “unitholder” or the “shareholder”). Next is the management company, a company that provides unitholders with advisory services and invests their money in the securities (e.g., bonds and shares) in the investment fund’s portfolio. The management company may offer many funds with particular features and conditions. Lastly, a depositary entity safeguards fund assets (i.e., the money invested) and monitors everything the fund manager does on the unitholders’ behalf. 

The value of investment funds depends on the yield of all financial assets they invest in with the money they pool from investors.

How does an investment fund work?

Investment funds are baskets of securities chosen because of their growth prospects by asset management companies that are experts in financial markets. These funds work on a co-ownership basis: when you invest in a fund, you acquire ownership that corresponds to a share of a basket of equities or bonds already selected and actively managed by experts. This means investing in funds can feel safer than buying individual securities, particularly for a novice. Moreover, investment funds tend to have variable capital, which allows you to trade in your securities on a secondary market at any given moment. There are three broad categories of fund: actively managed investment funds, passively managed investment funds and hedge funds.

  • Actively managed investment funds

These funds aim to outperform the market. The managers seek to deliver attractive returns by outperforming a benchmark index. They monitor the economic environment and adjust the assets of their fund accordingly. They buy and sell in large quantities in order to maximise capital gains. In this case, the level of risk depends on how the portfolio is broken down into growth stocks, value stocks, small caps and large caps.

  • Passively managed funds (index funds)

These aim to replicate changes in a particular market, region or sector. Passive managers prioritise investment security and buy stocks that make up a stock exchange index. In Luxembourg, for example, the main stock exchange index is the LuxX, which comprises the country’s 10 biggest companies by market capitalisation. The managers adjust the composition of the portfolio based on changes in the chosen index. The level of risk is the same as for the market the funds aim to replicate.

  • Hedge funds demand caution

Hedge funds involve risky investments in an environment with fewer regulations. Managers seek high returns and use strategies that are not permitted for passively and actively managed investment funds. For example, they can sell short and use debt to increase their investment capacity (leverage). If you are not too averse to risk, investing in hedge funds can be a good source of diversification. If you are, it is probably sensible to avoid them.

How to choose an investment fund

Before choosing an investment fund, it’s important to know its risks, costs and other features, and to spend enough time researching it to make an informed decision. We can use an investment fund simulator, a calculator that works out how much we should invest for a specific rate of return, with a suitability test from management companies to ensure a fund suits our investor profile. 

As investors, we should take into account our personal finances, objectives and the level of risk we are prepared to assume so that our investments match our profile and circumstances. 

A key factor is the investment term. Each fund has conditions on guarantees, the investment term and the markets in which it invests. Investors should make investments within their means. Other key factors are a fund’s redemption and management fees or period and rate of return.

 

Conclusion:

As your financial circumstances change over time, you can change how you invest to suit your needs. You can invest lump sums as and when you can, or smaller regular amounts in a monthly investment plan.

If you have the money available, you can start investing straight away. The sooner you invest, the longer your investment has to grow. Alternatively, investing a regular amount each month can help iron out fluctuations in the stock market, particularly in a volatile market.

The value of your investments can go down as well as up, and you may not get back what you originally invested. If you have any doubts about which investment product is right for you please contact your financial adviser.

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