An investment fund represents the pooled assets of many investors. After depositing the amount to be invested, each investor acquires corresponding shares in the total assets. The fund is managed by a professional fund management team within an investment company which invests the assets according to specific guidelines.
The term of an investment fund is generally unlimited. The investment company is obligated to repurchase the issued shares at the redemption price at any time. In open-end funds, new shares can be issued at any time; in closed-end funds, there is a fixed, unchangeable number of shares.
Advantages of investment funds for private investors
The riskier the investment category, the more necessary it becomes to diversify risk. Equity funds, for example, often manage over a hundred different individual securities – such extensive diversification is usually impossible for an individual investor. Additional benefits include long-term wealth accumulation through savings plans and professional management. The fact that qualified managers constantly monitor market and stock exchange developments and regularly rebalance portfolios not only saves investors a great deal of time and stress but also increases the likelihood of achieving their target returns. In Austria, investors have several hundred funds to choose from. It’s recommended to stick with your chosen fund long-term, as high sales charges are incurred when purchasing funds – and these costs must first be recouped through the fund’s performance.
Types of investment funds
Investment funds are primarily classified based on the type of securities they hold:
- Equity funds: In equity funds, the investment company invests exclusively in stocks. The value of the equity fund depends on the prices of the underlying stocks. To avoid being affected by the performance of individual stocks, equity funds invest in a large number of different stocks.
- Bond funds: Here, the investment company invests only in bonds. Bond funds, like the underlying bonds themselves, are very popular with investors. As a result, more and more new bond funds are being launched.
- Balanced funds: Balanced funds invest in both stocks and bonds. In terms of risk and expected returns, they fall between stock funds and bond funds. With balanced funds, fund managers have the option to switch between the stock and bond markets depending on market conditions: If prices on the stock market rise, more can be invested in that market and less in bonds, or vice versa.
- Country and sector funds: Funds in this investment category focus on selected countries (e.g. Austrian funds) or sectors. This focus enables investors to tailor their investment priorities accordingly.
There are also other types of funds, such as fund of funds (where fund of funds managers compile a portfolio of individual funds from various fund management companies) or hedge funds (which invest, amongst other things, in forward contracts in order to be as independent as possible from economic trends).
