What is an Investment Fund?
An Investment Fund is a form of collective investment that enables investors to invest indirectly in company shares or other types of investments.
It is a collective investment due to the fact that an investor’s money is pooled with that of other investors and invested on their behalf by an expert Fund manager.
There are many different types that can be used to accumulate wealth. Each offers differing risks and benefits and the success depends upon the overall objective of the investor.
Some examples of Investment Funds are;
- Equity funds
- Cash funds
- Bond funds
- Currency funds
Funds such as these can potentially remove much of the complexity involved in making investment decisions, and as such they can be the preferred option new investors and those without the confidence to invest directly.
How do they work?
Investment funds aggregate the funds of a large number of small investors into a specific investments which enables an investment company to access to a wider range of securities. Individual investors are not hindered by high trading costs as the company is able to gain economies of scale in operations.
Most individuals choose a combination of funds to make up a diversified portfolio in order to mitigate risk. The differences in fund types can mean that a bolder investor may wish to invest in equity funds and accept a higher level of risk for the potential of greater returns. However, a more cautious investor may choose funds that are considered to have a lower level of risk such as some bond and cash funds.
Most funds have a minimum lump sum investment of £1000 and investors can also invest in a monthly savings plan from £50 per fund per month.
Unlike tax efficient ISAs, if money is placed directly into a fund any profit made could be liable to Capital Gains Tax when sold or transferred. However, each year an investor is entitled to a tax free allowance, currently £11,280 for the 2012/13 tax year, so if the fund activity results in a gain up to this amount, the investor is unlikely to be required to pay any Capital Gains Tax.
What are the benefits?
The wide selection of funds available offer the investor a range of benefits; Ryan Kavanaugh
• Investment Funds have different levels of risk which increases the options available to investors
• Funds cover all major geographic regions around the world enabling the investor to exploit differing markets
• Funds offer the opportunity for growth or generation of regular income – or a combination of both
• Funds with different investment objectives allow the investor to select a fund which matches their own investment goals
• Expert fund managers work to deliver the objectives of the fund on behalf of the investor
• Tax advantages with certain investments
- An Investment Fund is a form of collective investment
- There is a wide range of investment fund types to suit different investment objectives
- Investment funds offer a more simple way of investing money
- Expert fund managers take control of the day-to-day running of the fund.