An investment fund is an investment vehicle that allows a large number of people to pool their money together in order to invest in a range of different securities. The most common assets invested in are stocks [equities], bonds, property or commodities.
By pooling their money together, smaller investors get the benefit of professional asset management and access to the considerable research backing all the investment decisions in the fund. They will get that at a much cheaper cost than having to purchase all the assets individually and they will save on dealing costs and stockbroker fees, etc. They also get the benefit of diversification because a single fund will typically invest in about 400 individual stocks in different sectors of the economy and in different countries and continents.
All funds will have different objectives; some are designed to deliver a regular income, others to achieve capital growth for the investor. Funds are grouped together into categories determined by this aim and by where in the world the underlying stocks or bonds are from.
A fund can be actively managed, where the fund manager chooses which securities to invest in from a larger pool and they will be supported in that task by a research team of analysts. Alternatively, a fund can be passively managed; this is where the investor can gain exposure to a particular index or commodity, providing that investor with the same returns as the underlying market. The indices usually invested in are the S & P 500; FTSE 100; Eurostoxx 50 or the Nikkei. Commodities include gold and silver or oil and soya beans.
Funds are suitable for investors who do not have the time or expertise to construct and monitor a portfolio themselves. They require a smaller investment than picking individual stocks or bonds.
An investor with as little as €5,000 investing in a fund will be able to get a similar diversification within that fund as a larger investor with €200,000 who invests in a discretionary managed portfolio of directly held stocks and bonds.