People who are interested in investments and wish to have a balanced risk on their investments, prefer to go with mutual funds. Various types of mutual funds are suggested to investors by their investment advisors based on their goals, horizon and risk appetite. Mutual funds pool money from the investors and invest it in a variety of asset classes. There are other funds also which pool money from investors and invest this money on their behalf. They are termed as alternative investments. This post discusses various types of alternative investments. These are also the investment funds but are different from general mutual funds.
What are Investment Funds?
An investment fund is a collective investment of money pooled from multiple investors. It manages a variety of asset classes like equity, commodities, bonds etc. and invest money on behalf of investors. The fund houses which manage these funds hire professional managers to manage these funds professionally. These managers are known as fund managers or investment managers. The diversification in asset class benefits the investors in risk management. Since the money is invested in a class of assets, it reduces transaction costs.
Types of Investment Funds
There are following types of investment funds:
Mutual Funds
These funds pool money from investors and invest in securities such as equity, bond etc. The investors may be retail investors or institutional investors. These funds provide a high level of diversification in their asset class. These funds are categorised into two main categories – open-ended and closed-ended. Open-ended funds do not have any fixed time period while closed-ended funds have a fixed time period of investments. These funds are not traded on any exchange and their daily unit price is updated after the closing of the stock market. An investor can directly invest in mutual funds or it can be done through and ARN.
Exchange Traded Fund (ETFs)
These are very much similar to the mutual funds but they are different in working. They are traded on the exchange like stocks and their unit price is updated throughout the day. They have a fixed asset class that means, before launching, the scheme makes it cleary fix the investment class. These funds invest in stocks, commodities, bonds, or currencies. Most ETFs track an index like Nifty 50. Investors buy or sell these funds through a stock broker.
Fund of Funds
This investment fund manages a portfolio of other investment funds. It does not directly invest in securities, commodities or currencies. It is sometimes known as multi-manager investment. These funds are of two types – fettered and unfettered. Fettered funds manage a portfolio of funds of the same company while unfettered funds manage the portfolio of funds of different companies.
Hedge Funds
A hedge fund is an offshore investment fund which is engaged in the speculations using borrowed capital. These funds tend to invest in high-risk securities and involve multiple investment strategies
Private Equity Funds
It is a special type of investment fund which is not listed on any exchange. It is composed of funds and investors that directly invest in private companies. or it may be engaged in buyouts of public companies. It comprises the limited partners who own the 99% of the shares of the company.
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Disclaimer: This post is meant for educational purpose only. Please contact your financial/investment advisor for necessary suggestions.
Tags: #investments #Mutual Funds
