What is an investment fund?
It is an investment complex in common property of joint stock companies, private individuals, and legal entities. It is managed by the company, which operates to achieve investors’ purposes.
Objectives of an investment fund
Attracting funds in the economy and providing easy access to securities for non-professionals are the main objectives of investment funds. Licensed professional members like investment funds manage assets in the market.
From the history of investment funds
Recently, in the stock markets of the Western developed countries, there has been rapid progress in the field of investment funds. For example, the amount of US assets reached the limit of $4 trillion until mid-1997. This volume is comparable with the total volume of assets in commercial banks ($4.7 trillion). In addition, it was more than the total assets of such important investors as insurance companies and pension funds for the period of 1980-1994. The asset value of investment funds rose sharply from $5 to $100 billion in the UK market, which was a little bit less than the markets of rivals. Some European markets such as Portugal and Spain achieved 40% annual growth of investment funds.
Principles of investment funds’ functioning
As a participant of the securities market, an investment fund accumulates funds of investors (mostly small) to invest in financial instruments in order to generate income. As a result, it can be considered a form of collective investment fund. As a financial intermediary, it collects investor’s funds through the issuance of securities (typically, investment shares or stocks.) The bulk of income goes to an investor through percentage of equity, rate of return, increased cost of securities, etc. In fact, investment portfolio includes these instruments. Income received by all the fund investors is a proportionate amount of their investments in the value of its assets.
Types of investment funds
Depending on a form, all funds can be divided into joint-stock and mutual funds.
Joint-stock investment fund is engaged only in investing. They offer ordinary shares. It means that only investment in securities gives a possibility to become a member of this fund. To stop participating in the fund, an investor has to sell his shares at any open market, for example, stock exchange.
Mutual funds do not act as a legal entity. This type of funds is considered to be a complex consisting of property held in trust. Only through the purchase of shares in a management company, it is possible to become an investor of such fund. These shares can exist in the form of securities or of documents confirming identity of individual investors. Overall, fund investors buy and sell these shares in accordance with the applicable rules. Managing the investment fund is an exclusive right of the securities market participants. Basically, it is performed by a licensed management company.
Investment funds can be differentiated according to investment objects. They can be divided into bond funds, stock funds, and mixed funds. Additionally, a fund may also specialize in the fields like engineering, oil, gas industry, etc.