An investment fund is a collective investment institution whose objective is to pool funds from different investors, whether natural or legal, to invest them in various financial instruments. Management is delegated to a management company and a depository company, which may be a bank or financial institution.
Investment funds are commonly used financial instruments that, when properly managed, can be an excellent option when seeking future returns. Through this financial instrument, funds are attracted from various investors, both in cash and in real estate or listed securities. This investment is managed by a bank or other financial institution. Since it is a collective investment, its returns are also collective. Each investor uses a share that can be withdrawn when specified in the contract, with the resulting profits or losses.
We must understand and take into account certain activities and behaviors of investment funds if we plan to invest a certain amount of money in them. One of these is to be clear about the minimum time the asset must be held in the fund. Therefore, it is essential to know what type of collective portfolio we are choosing. Among the options are:
- Open-ended investment funds: Where the investment can be withdrawn at any time. Many of these funds establish a minimum duration and apply a penalty policy for failure to comply with this deadline.
- Tiered Investment Funds: Regulations apply that assign a minimum holding period for withdrawing assets. This period must not be less than 30 days.
- Closed-end investment funds: In this type of fund, there is a specific deadline that participants must meet before withdrawing their assets.
Among the enormous advantages that can be generated by using investment funds as a financial instrument, we have:
– One of its main characteristics is that by diversifying financial activities, existing risk is greatly reduced.
– By entrusting investment management to a financial institution, you have a guarantee of professional efficiency.
– The security in the management of investment and administration operations is greater than with other financial instruments.
Depending on their performance, we can also distinguish two types of investment funds:
- Relative performance funds
In these funds, investors know the area in which they will invest (stocks, bonds, commodities, stock indices), the geographic region where the investment will be made, and whether they will be placed in a specific market sector (technology, pharmaceuticals). Here, investors participate in less risky investments that belong to a specific sector.
- Absolute return funds
These funds are managed by different brokers, without having any knowledge of what they are going to invest in (they can invest in anything: currencies, commodities, bonds, stocks, derivatives) and they use more speculative investment techniques, being generally much riskier.
Within these funds, we can distinguish two types: Alternative Management Funds, which are offered to individuals seeking both high returns and high risk. Hedge funds, which are not aimed at individuals, are for large assets from institutions and other investment funds. These funds carry very high risk, as they can lead to debt to make high-risk investments, the fees are high, and the liquidation period is calculated every three to six months.
