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An investment fund is a way of
investing Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages include an ability to: * hire professional investment managers, who may offer better returns and more adequate risk management; * benefit from
economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
, i.e., lower transaction costs; * increase the asset diversification to reduce some unsystematic risk. It remains unclear whether professional active investment managers can reliably enhance risk adjusted returns by an amount that exceeds fees and expenses of investment management. Terminology varies with country but investment funds are often referred to as investment pools, collective investment vehicles, collective investment schemes, managed funds, or simply funds. The regulatory term is undertaking for collective investment in transferable securities, or short collective investment undertaking (cf.
Law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
). An investment fund may be held by the public, such as a
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
,
exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the ...
,
special-purpose acquisition company A special purpose acquisition company (SPAC; ), also known as a "blank check company", is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional i ...
or
closed-end fund A closed-end fund (CEF) is a fund that raises capital by issuing a fixed number of shares which are not redeemable, and then invest that capital in financial assets such as stocks and bonds. Unlike open-end funds, new shares in a closed-end fund ...
, or it may be sold only in a
private placement Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Generally, these investors include friend ...
, such as a
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
or
private equity fund A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity ...
. The term also includes specialized vehicles such as collective and common trust funds, which are unique bank-managed funds structured primarily to commingle assets from qualifying pension plans or trusts. Investment funds are promoted with a wide range of investment aims either targeting specific geographic regions (''e.g.,'' emerging markets or Europe) or specified industry sectors (''e.g.,'' technology). Depending on the country there is normally a bias towards the domestic market due to familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance, and other factors such as fees.


History

The first (recorded) professionally managed investment funds or collective investment schemes, such as
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s, were established in the
Dutch Republic The United Provinces of the Netherlands, also known as the (Seven) United Provinces, officially as the Republic of the Seven United Netherlands (Dutch: ''Republiek der Zeven Verenigde Nederlanden''), and commonly referred to in historiography ...
. Amsterdam-based businessman Abraham van Ketwich (also known as Adriaan van Ketwich) is often credited as the originator of the world's first mutual fund.


Law

The term "collective investment scheme" is a legal concept deriving initially from a set of
European Union Directive A directive is a legal act of the European Union that requires member states to achieve a particular result without dictating the means of achieving that result. Directives first have to be enacted into national law by member states before thei ...
s to regulate mutual fund investment and management. The
Undertakings for Collective Investment in Transferable Securities Directives The Undertakings for Collective Investment in Transferable Securities Directive (UCITS2009/65/ECis a consolidated EU directive that allows collective investment schemes to operate freely throughout the EU on the basis of a single authorisation fr ...
br>85/611/EEC
as amended b
2001/107/EC
an
2001/108/EC
(typically known as UCITS for short) created an EU-wide structure, so that funds fulfilling its basic regulations could be marketed in any member state. The basic aim of collective investment scheme regulation is that the financial "products" that are sold to the public are sufficiently transparent, with full disclosure about the nature of the terms. In the United Kingdom, the primary statute is the
Financial Services and Markets Act 2000 The Financial Services and Markets Act 2000c 8 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority (FSA) as a regulator for insurance, investment business and banking, and the Financial Ombudsman Serv ...
, where Part XVII, sections 235 to 284 deal with the requirements for a collective investment scheme to operate. It states in section 235 that a "collective investment scheme" means "any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income".


Generic information—structure


Constitution and terminology

Collective investment vehicles may be formed under company law, by legal
trust Trust often refers to: * Trust (social science), confidence in or dependence on a person or quality It may also refer to: Business and law * Trust law, a body of law under which one person holds property for the benefit of another * Trust (bus ...
or by
statute A statute is a formal written enactment of a legislative authority that governs the legal entities of a city, state, or country by way of consent. Typically, statutes command or prohibit something, or declare policy. Statutes are rules made by le ...
. The nature of the vehicle and its limitations are often linked to its constitutional nature and the associated tax rules for the type of structure within a given jurisdiction. Typically there is: * A fund manager or
investment manager Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institutio ...
who manages the investment decisions. * A
fund administrator Fund may refer to: * Funding is the act of providing resources, usually in form of money, or other values such as effort or time, for a project, a person, a business, or any other private or public institution ** The process of soliciting and gathe ...
who manages the trading, reconciliations, valuation and unit pricing. * A board of directors or trustees who safeguard the assets and ensure compliance with laws, regulations and rules. * The shareholders or unitholders who own (or have rights to) the assets and associated income. * A "marketing" or "distribution" company to promote and sell shares/units of the fund. Please see below for general information on specific forms of vehicles in different jurisdictions.


Net asset value

The
net asset value Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exch ...
(NAV) is the value of a vehicle's assets minus the value of its liabilities. The method for calculating this varies between vehicle types and jurisdiction and can be subject to complex regulation.


Open-end fund

An open-end fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund's
net asset value Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exch ...
. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.


Closed-end fund

A
closed-end fund A closed-end fund (CEF) is a fund that raises capital by issuing a fixed number of shares which are not redeemable, and then invest that capital in financial assets such as stocks and bonds. Unlike open-end funds, new shares in a closed-end fund ...
issues a limited number of shares (or units) in an
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
(or
IPO An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
) or through private placement. If shares are issued through an IPO, they are then traded on a
stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for th ...
. or directly through the fund manager to create a
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the s ...
subject to
market forces In economics, a market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering ...
. The price that investors receive for their shares may be significantly different from
net asset value Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exch ...
(NAV); it may be at a "premium" to NAV (i.e., higher than NAV) or, more commonly, at a "discount" to NAV (i.e., lower than NAV). In the United States, at the end of 2018, there were 506 closed-end mutual funds with combined assets of $0.25 trillion, accounting for 1% of the U.S. industry.


Exchange-traded funds

Exchange-traded funds (ETFs) combine characteristics of both closed-end funds and open-end funds. They are structured as open-end investment companies or UITs. ETFs are traded throughout the day on a stock exchange. An
arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the ...
mechanism is used to keep the trading price close to
net asset value Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exch ...
of the ETF holdings. In the United States, at the end of 2018, there were 1,988 ETFs in the United States with combined assets of $3.3 trillion, accounting for 16% of the U.S. industry.


Unit investment trusts

Unit investment trusts (UITs) are issued to the public only once when they are created. UITs generally have a limited life span, established at creation. Investors can redeem shares directly with the fund at any time (similar to an open-end fund) or wait to redeem them upon the trust's termination. Less commonly, they can sell their shares in the open market. Unlike other types of mutual funds, unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT. In the United States, at the end of 2018, there were 4,917 UITs with combined assets of less than $0.1 trillion.


Gearing and leverage

Some collective investment vehicles have the power to borrow money to make further investments; a process known as gearing or leverage. If markets are growing rapidly this can allow the vehicle to take advantage of the growth to a greater extent than if only the subscribed contributions were invested. However this premise only works if the cost of the borrowing is less than the increased growth achieved. If the borrowing costs are more than the growth achieved a net loss is achieved. This can greatly increase the investment risk of the fund by increased volatility and exposure to increased capital risk. Gearing was a major contributory factor in the collapse of the
split capital investment trust A split capital investment trust (split) is a type of investment trust which issues different classes of share to give the investor a choice of shares to match their needs. Most splits have a limited life determined at launch known as the wind-up d ...
debacle in the UK in 2002.


Availability and access

Collective investment vehicles vary in availability depending on their intended investor base: *Public-availability vehicles—are available to most investors within the jurisdiction they are offered. Some restrictions on age and size of investment may be imposed. *Limited-availability vehicles—are limited by laws, regulations, and/or rules to experienced and/or sophisticated investors and often have high minimum investment requirements. *Private-availability vehicles—may be limited to family members or whomever set up the fund. They are not publicly traded and may be arranged for tax- or estate-planning purposes.


Limited duration

Some vehicles are designed to have a limited term with enforced redemption of shares or units on a specified date.


Unit or share class

Many collective investment vehicles split the fund into multiple classes of shares or units. The underlying assets of each class are effectively pooled for the purposes of investment management, but classes typically differ in the fees and expenses paid out of the fund's assets. These differences are supposed to reflect different costs involved in servicing investors in various classes; for example: * One class may be sold through a stockbroker or
financial adviser A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
with an initial commission (front-end load); such a class might be called ''retail'' shares. * Another class may be sold with no commission (load) direct to the public; such a class is called ''direct'' shares. * Still a third class might have a high minimum investment limit and only be open to financial institutions; such a class is called ''institutional'' shares. In some cases, by aggregating regular investments by many individuals, a retirement plan (such as a
401(k) plan In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of the ...
) may qualify to purchase "institutional" shares (and gain the benefit of their typically lower expense ratios) even though no members of the plan would qualify individually. Some of the fund classes: * Class A * Class B * Class C * Class D * Class E * Class W * Class Z


Generic information—advantages


Diversity and risk

One of the main advantages of collective investment is the reduction in
investment risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial ...
(
capital risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
) by
diversification Diversification may refer to: Biology and agriculture * Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes * Agricultural diversification involves the re-allocation of some of a farm's resources to n ...
. An investment in a single equity may do well, but it may collapse for investment or other reasons (e.g., Marconi). If your money is invested in such a failed holding you could lose your capital. By investing in a range of equities (or other securities) the capital risk is reduced. *''The more diversified your capital, the lower the capital risk''. This investment principle is often referred to as spreading risk. Collective investments by their nature tend to invest in a range of individual securities. However, if the securities are all in a similar type of
asset class In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having ...
or
market sector The term market sector is used in economics and finance to describe a part of the economy. It is usually a broader term than ''industry'', which is a set of businesses that are buying and selling such similar goods and services that they are in di ...
then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk investment managers may diversify into different non-perfectly-correlated asset classes. For example, investors might hold their assets in equal parts in
equities In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
and
fixed income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...
securities.


Reduced dealing costs

If one investor had to buy a large number of direct investments, the amount this person would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits).


Reduction or elimination of requirement to spend personal time investing

An investor that chooses to use an investment fund as a way to invest his or her money does not need to spend as much personal time making investment decisions, doing investment research, or performing actual trades. Instead, these actions and decisions will be done by one or more fund managers managing the investment fund.


Generic information—disadvantages


Costs

The
fund manager Fund may refer to: * Funding is the act of providing resources, usually in form of money, or other values such as effort or time, for a project, a person, a business, or any other private or public institution ** The process of soliciting and gathe ...
managing the investment decisions on behalf of the investors will of course expect remuneration. This is often taken directly from the fund assets as a fixed percentage each year or sometimes a variable (performance based) fee. If the investor managed their own investments, this cost would be avoided. Often the cost of
advice Advice (noun) or advise (verb) may refer to: * Advice (opinion), an opinion or recommendation offered as a guide to action, conduct * Advice (constitutional law) a frequently binding instruction issued to a constitutional office-holder * Advice (p ...
given by a stockbroker or
financial adviser A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
is built into the vehicle. Often referred to as commission or
load Load or LOAD may refer to: Aeronautics and transportation *Load factor (aeronautics), the ratio of the lift of an aircraft to its weight *Passenger load factor, the ratio of revenue passenger miles to available seat miles of a particular transpo ...
(in the
U.S. The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
) this charge may be applied at the start of the plan or as an ongoing percentage of the fund value each year. While this cost will diminish your returns it could be argued that it reflects a separate payment for an advice service rather than a detrimental feature of collective investment vehicles. Indeed, it is often possible to purchase units or shares directly from the providers without bearing this cost.


Lack of choice

Although the investor can choose the type of fund to invest in, they have no control over the choice of individual holdings that make up the fund.


Loss of owner's rights

If the investor holds shares directly, he has the right to attend the company's annual general meeting and vote on important matters. Investors in a collective investment vehicle often have none of the rights connected with individual investments within the fund.


Style


Investment aims and benchmarking

Each fund has a defined investment goal to describe the remit of the investment manager and to help investors decide if the fund is right for them. The investment aims will typically fall into the broad categories of Income (value) investment or Growth investment. Income or value based investment tends to select stocks with strong income streams, often more established businesses. Growth investment selects stocks that tend to reinvest their income to generate growth. Each strategy has its critics and proponents; some prefer a ''blend'' approach using aspects of each. Funds are often distinguished by asset-based categories such as ''equity'', ''bonds'', ''property'', etc. Also, perhaps most commonly funds are divided by their ''geographic markets'' or ''themes''. Examples *The largest markets—
U.S. The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
,
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
,
Europe Europe is a large peninsula conventionally considered a continent in its own right because of its great physical size and the weight of its history and traditions. Europe is also considered a Continent#Subcontinents, subcontinent of Eurasia ...
, UK and
Far East The ''Far East'' was a European term to refer to the geographical regions that includes East and Southeast Asia as well as the Russian Far East to a lesser extent. South Asia is sometimes also included for economic and cultural reasons. The ter ...
are often divided into smaller funds e.g. US large caps, Japanese smaller companies, European Growth, UK mid caps etc. *Themed funds—Technology, Healthcare, Socially responsible funds. In most instances whatever the investment aim the fund manager will select an appropriate index or combination of indices to measure its performance against; e.g.
FTSE 100 The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" , is a share index of the 100 companies listed on the London Stock Exchange with (in principle) the highest market ...
. This becomes the benchmark to measure success or failure against.


Active or passive management

The aim of most funds is to make money by investing in assets to obtain a real return (i.e. better than inflation). The philosophy used to manage the fund's investment vary and two opposing views exist.
Active management Active management (also called ''active investing'') is an approach to investing. In an actively managed portfolio of investments, the investor selects the investments that make up the portfolio. Active management is often compared to passive man ...
—Active managers seek to outperform the
market Market is a term used to describe concepts such as: * Market (economics), system in which parties engage in transactions according to supply and demand * Market economy *Marketplace, a physical marketplace or public market Geography *Märket, a ...
as a whole, by selectively holding securities according to an
investment strategy In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics an ...
. Therefore, they employ dynamic portfolio strategies, buying and selling investments with changing market conditions, based on their belief that particular individual holdings or sections of the market will perform better than others.
Passive management Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio. Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming ...
—Passive managers stick to a portfolio strategy determined at outset of the fund and not varied thereafter, aiming to minimize the ongoing costs of maintaining the portfolio. Many passive funds are
index fund An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can a specified basket of underlying investments.Reasonable Investor(s), Boston University Law Review, avail ...
s, which attempt to replicate the performance of a market index by holding securities proportionally to their value in the market as a whole. Another example of passive management is the "
buy and hold Buy and hold, also called position trading, is an investment strategy whereby an investor buys financial assets or non-financial assets such as real estate, to hold them long term, with the goal of realizing price appreciation, despite volatility. ...
" method used by many traditional
unit investment trust In U.S. financial law, a unit investment trust (UIT) is an investment product offering a fixed (unmanaged) portfolio of securities having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UI ...
s where the portfolio is fixed from outset. Additionally, some funds use a hybrid management strategy of
enhanced indexing In finance, enhanced indexing is any indexing strategy employed with the intention of outperforming strict Index fund, indexing. Enhanced indexing attempts to generate modest excess returns compared to traditional index funds and other passive manag ...
, in which the manager minimizes costs by broadly following a passive indexing strategy, but has the discretion to actively deviate from the index in the hopes of earning modestly higher returns. An example of active management success *In 1998
Richard Branson Sir Richard Charles Nicholas Branson (born 18 July 1950) is a British billionaire, entrepreneur, and business magnate. In the 1970s he founded the Virgin Group, which today controls more than 400 companies in various fields. Branson expressed ...
(head of
Virgin Virginity is the state of a person who has never engaged in sexual intercourse. The term ''virgin'' originally only referred to sexually inexperienced women, but has evolved to encompass a range of definitions, as found in traditional, modern ...
) publicly bet
Nicola Horlick Nicola Karina Christina Horlick (''née'' Gayford; born 28 December 1960) is a British investment fund manager, dubbed City 'superwoman' in the British media. She has publicly supported the Labour Party and latterly, the Liberal Democrats. Early ...
(head of SG Asset Management) that her SG UK Growth fund would not beat the
FTSE 100 The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" , is a share index of the 100 companies listed on the London Stock Exchange with (in principle) the highest market ...
index, nor his Virgin Index Tracker fund over three years, nor achieve its stated aim to beat the index by 2% each year. He lost and paid £6,000 to charity.


Alpha, Beta, R-squared and standard deviation

When analysing investment performance, statistical measures are often used to compare 'funds'. These statistical measures are often reduced to a single figure representing an aspect of past performance: *
Alpha Alpha (uppercase , lowercase ; grc, ἄλφα, ''álpha'', or ell, άλφα, álfa) is the first letter of the Greek alphabet. In the system of Greek numerals, it has a value of one. Alpha is derived from the Phoenician letter aleph , whic ...
represents the fund's return when the
benchmark Benchmark may refer to: Business and economics * Benchmarking, evaluating performance within organizations * Benchmark price * Benchmark (crude oil), oil-specific practices Science and technology * Benchmark (surveying), a point of known elevatio ...
's return is 0. This shows the fund's performance relative to the benchmark and can demonstrate the value added by the
fund manager Fund may refer to: * Funding is the act of providing resources, usually in form of money, or other values such as effort or time, for a project, a person, a business, or any other private or public institution ** The process of soliciting and gathe ...
. The higher the 'alpha' the better the manager. Alpha investment strategies tend to favour ''stock selection'' methods to achieve growth. *
Beta Beta (, ; uppercase , lowercase , or cursive ; grc, βῆτα, bē̂ta or ell, βήτα, víta) is the second letter of the Greek alphabet. In the system of Greek numerals, it has a value of 2. In Modern Greek, it represents the voiced labiod ...
represents an estimate of how much the fund will move if its benchmark moves by 1 unit. This shows the fund's sensitivity to changes in the market. Beta investment strategies tend to favour asset allocation models to achieve ''outperformance''. *
R-squared In statistics, the coefficient of determination, denoted ''R''2 or ''r''2 and pronounced "R squared", is the proportion of the variation in the dependent variable that is predictable from the independent variable(s). It is a statistic used ...
is a measure of the association between a fund and its benchmark. Values are between 0 and 1. Perfect correlation is indicated by 1, and 0 indicates no correlation. This measure is useful in determining if the fund manager is adding value in their investment choices or acting as a ''closet tracker'' mirroring the market and making little difference. For example, an index fund will have an R-squared with its benchmark index very close to 1, indicating close to perfect correlation (the index fund's fees and
tracking error In finance, tracking error or active risk is a measure of the risk in an investment portfolio that is due to active management decisions made by the portfolio manager; it indicates how closely a portfolio follows the index to which it is benchmarked ...
prevent the correlation from ever equalling 1). *
Standard deviation In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean (also called the expected value) of the set, while ...
is a measure of volatility of the fund's performance over a period of time. The higher the figure the greater the variability of the fund's performance. High historical volatility may indicate high future volatility, and therefore increased investment risk in a fund.


Types of risk

Depending on the nature of the investment, the type of 'investment' risk will vary. A common concern with any investment is that you may lose the money you invest—your capital. This risk is therefore often referred to as capital risk. If the assets you invest in are held in another currency there is a risk that currency movements alone may affect the value. This is referred to as currency risk. Many forms of investment may not be readily salable on the open market (e.g. commercial property) or the market has a small capacity and investments may take time to sell. Assets that are easily sold are termed ''liquid'' therefore this type of risk is termed
liquidity risk Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price. Types Market liquidity – An asset cannot be so ...
.


Charging structures and fees


Fee types

For an open-end fund, there may be an initial charge levied on the purchase of units or shares this covers dealing costs, and commissions paid to intermediaries or salespeople. Typically this fee is a percentage of the investment. Some vehicles waive the initial charge and apply an exit charge instead. This may be gradually disappearing after a number of years. Closed-end funds traded on an exchange are subject to brokerage commissions, in the same manner as a
stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
trade. The vehicle will charge an annual management charge (AMC) to cover the cost of administering the vehicle and remunerating the investment manager. This may be a flat rate based on the value of the assets or a performance related fee based on a predefined target being achieved. Different unit/share classes may have different combinations of fees/charges.


Pricing models

Open-ended vehicles are either ''dual priced'' or ''single priced''. Dual priced vehicles have a buying (offer) price and selling or (bid) price. The buying price is higher than the selling price, this difference is known as the ''spread'' or '' bid–offer spread''. The difference is typically 5% and may be varied by the vehicle's manager to reflect changes in the market; the amount of variation may be limited by the vehicles rules or regulatory rules. The difference between the buying and selling price includes initial charge for entering the fund. The internal workings of a fund are more complicated than this description suggests. The manager sets a price for creation of units/shares and for cancellation. There is a differential between the cancellation and bid prices, and the creation and offer prices. The additional units are created are place in the ''managers box'' for future purchasers. When heavy selling occurs units are liquidated from the ''managers box'' to protect the existing investors from the increased dealing costs. Adjusting the bid/offer prices closer to the cancellation/creation prices allows the manager to protect the interest of the existing investors in changing market conditions. Most unit trusts are dual priced. Single priced vehicles notionally have a single price for units/shares and this price is the same if buying or selling. As single prices vehicle cannot adjust the difference between the buying and selling price to adjust for market conditions, another mechanism, the ''dilution levy'' exists. SICAVs, OEICs and U.S. mutual funds are single priced. A dilution levy can be charged at the discretion of the fund manager, to offset the cost of market transactions resulting from large un-matched buy or sell orders. For example, if the volume of purchases outweigh the volume of sales in a particular trading period the fund manager will have to go to the market to buy more of the assets underlying the fund, incurring a brokerage fee in the process and having an adverse effect on the fund as a whole ("diluting" the fund). The same is the case with large sell orders. A dilution levy is therefore applied where appropriate and paid for by the investor in order that large single transactions do not reduce the value of the fund as a whole.


Internationally recognised collective investments

*
Exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the ...
s (ETFs)—an open-end fund traded by listed shares on major stock exchanges. *
Real Estate Investment Trusts A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping cente ...
(REITs)—a close-ended fund that invests in real estate. *
Sovereign investment fund A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as ...
s


United States market

Investment funds are regulated by the
Investment Company Act of 1940 The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an act of Congress which regulates investment funds. It was passed as a United States Public Law () on August 22, 1940, and is codified at . Along with the Securities Exc ...
, which broadly describes three major types: open-end funds,
closed-end funds A closed-end fund (CEF) is a fund that raises capital by issuing a fixed number of shares which are not redeemable, and then invest that capital in financial assets such as stocks and bonds. Unlike open-end funds, new shares in a closed-end fund ...
, and unit investment trusts. Open-end funds called
mutual funds A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
and ETFs are common. As of 2019, the top 5 asset managers accounted for 55% of the 19.3 trillion in mutual fund and ETF investments. However, for
active management Active management (also called ''active investing'') is an approach to investing. In an actively managed portfolio of investments, the investor selects the investments that make up the portfolio. Active management is often compared to passive man ...
, the top 5 account for 22% of the market, with the top 10 accounting for 30% and the top 25 accounting for 39%.
BlackRock BlackRock, Inc. is an American Multinational corporation, multi-national investment company based in New York City. Founded in 1988, initially as a Enterprise risk management, risk management and fixed income institutional asset manager, BlackR ...
and
Vanguard The vanguard (also called the advance guard) is the leading part of an advancing military formation. It has a number of functions, including seeking out the enemy and securing ground in advance of the main force. History The vanguard derives fr ...
are the top two when including passive investments. The top 5 active management funds in 2018 were
Capital Group Companies Capital Group is an American financial services company. It ranks among the world's oldest and largest investment management organizations, with over $2.6 trillion in assets under management. Founded in Los Angeles, California in 1931, it is pri ...
(using American Funds brand),
Fidelity Investments Fidelity Investments, commonly referred to as Fidelity, earlier as Fidelity Management & Research or FMR, is an American multinational financial services corporation based in Boston, Massachusetts. The company was established in 1946 and is on ...
,
Vanguard The vanguard (also called the advance guard) is the leading part of an advancing military formation. It has a number of functions, including seeking out the enemy and securing ground in advance of the main force. History The vanguard derives fr ...
,
T. Rowe Price T. Rowe Price Group, Inc. is an American publicly owned global investment management firm that offers funds, subadvisory services, separate account management, and retirement plans and services for individuals, institutions, and financial inter ...
, and
Dimensional Fund Advisors Dimensional Fund Advisors, L.P. (branded Dimensional abbreviated DFA) is a private investment firm headquartered in Austin, Texas. Dimensional was founded in Chicago in 1981 by David Booth, Rex Sinquefield and Larry Klotz. The company has affilia ...
; in 2008, the list included
PIMCO PIMCO (Pacific Investment Management Company, LLC) is an American investment management firm focusing on active fixed income management worldwide. PIMCO manages investments in many asset classes such as fixed income, equities, commodities, asset ...
and
Franklin Templeton Franklin Resources, Inc. is an American multinational holding company that, together with its subsidiaries, is referred to as Franklin Templeton; it is a global investment firm founded in New York City in 1947 as Franklin Distributors, Inc. It is ...
.
Closed-end funds A closed-end fund (CEF) is a fund that raises capital by issuing a fixed number of shares which are not redeemable, and then invest that capital in financial assets such as stocks and bonds. Unlike open-end funds, new shares in a closed-end fund ...
are less common, with around $277 billion in assets under management as of 2019, including about $107 billion in equities and $170 billion in bonds; market leaders include
Nuveen Nuveen is an American asset manager and wholly owned subsidiary of financial planning firm TIAA, itself known for its legacy focus on managing money for not-for-profit institutions such as universities and their employees. As a consequence of int ...
and BlackRock. Unit investment trusts are the least common, with about $6.5 billion in assets as of 2019.


UK-specific collective investments

*
Exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the ...
s (ETFs)—Open-ended with a corporate structure. *
Investment Trust An investment trust is a form of investment fund found mostly in the United Kingdom and Japan. Investment trusts are constituted as public limited companies and are therefore closed ended since the fund managers cannot redeem or create shares. ...
s—Introduced 1868. Closed-ended with corporate structure. *
Tax transparent fund A Tax Transparent Fund (TTF) - also known as an Authorised Contractual Scheme (ACS) Fund - is the proposed authorised collective investment scheme structure in the United Kingdom once the UK Finance Bill 2012 becomes an act and when the Financial ...
s—Introduced 2013. *
Open-ended investment companies An open-ended investment company (abbreviated to OEIC, pron. ) or investment company with variable capital (abbreviated to ICVC) is a type of open-ended Collective investment scheme, collective investment formed as a corporation under the Open-Ended ...
(OEICs or ICVCs)—Introduced 1997. Open-ended with a corporate structure. *
Unit Trusts A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on ...
—Introduced 1931. Open-ended with a trust structure. * Unitised Insurance Funds—Introduced 1970s. Open-ended with a life policy structure. *
With-profits policy A with-profits policy (Commonwealth) or participating policy (U.S.) is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company, or had been one when it began its w ...
—Open-ended with a life policy structure. *
Non mainstream pooled investment Non, non or NON can refer to: * ''Non'', a negatory word in French, Italian and Latin People *Non (given name) *Non Boonjumnong (born 1982), Thai amateur boxer * Rena Nōnen (born 1993), Japanese actress who uses the stage name "Non" since July ...
funds - introduced in 2014. Closed-ended or open-ended.


Canadian collective investments

*
Income Trust An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. They are especially useful for financial requirements of institutional investors such as pension funds, and for investors such as retir ...
s * Labour Sponsored Funds *
Mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s


Ireland specific collective investments

*
Common contractual fund A common contractual fund (CCF) is a collective investment scheme structure in Ireland introduced by the European Communities UCITS Regulations, 2003. The CCF is an unincorporated body established by a management company under which the parti ...
("CCF") *
Irish Collective Asset-Management Vehicle Qualifying Investor Alternative Investment Fund or QIAIF is a Central Bank of Ireland regulatory classification established in 2013 for Ireland's five tax-free legal structures for holding assets. The Irish Collective Asset-management Vehicle ...
(commonly referred to as an "
ICAV Qualifying Investor Alternative Investment Fund or QIAIF is a Central Bank of Ireland regulatory classification established in 2013 for Ireland's five tax-free legal structures for holding assets. The Irish Collective Asset-management Vehicle ...
")See Irish Collective Asset-management Vehicles Act 201
(Original Act available here)
/ref> *
Qualifying investor alternative investment fund (QIAIF) Qualifying Investor Alternative Investment Fund or QIAIF is a Central Bank of Ireland regulatory classification established in 2013 for Ireland's five tax-free legal structures for holding assets. The Irish Collective Asset-management Vehicl ...
* Retail Investor Alternative Investment Fund * Loan Originating Alternative Investment Fund (L-QIAIF)


European collective investments

*
SICAV A SICAV is a collective investment scheme common in Western Europe, especially Luxembourg, Switzerland, Italy, Spain, Belgium, Malta, France, and the Czech Republic. SICAV is an acronym in French for ''société d'investissement à capital variabl ...
s *
UCITS The Undertakings for Collective Investment in Transferable Securities Directive (UCITS2009/65/ECis a consolidated EU directive that allows collective investment schemes to operate freely throughout the EU on the basis of a single authorisation fro ...


France and Luxembourg

*FCP (
Fonds commun de placement Fonds commun de placement translates to "investment funds" or "mutual funds", and are open-ended collective investment funds based that are neither trust or company law based. They are similar to common contractual funds in Ireland, tax transparent ...
) (unincorporated investment fund or common fund) *SICAF (Société d'investissement à capital fixe) (Investment company with fixed capital) *
SICAV A SICAV is a collective investment scheme common in Western Europe, especially Luxembourg, Switzerland, Italy, Spain, Belgium, Malta, France, and the Czech Republic. SICAV is an acronym in French for ''société d'investissement à capital variabl ...
(Société d'investissement à capital variable) (Investment company with variable capital)


Netherlands and Belgium

*BEVAK (Investment company with fixed capital) *BEVEK (Investment Company with variable capital) *PRIVAK (Closed-end investment company)


Ukraine

*Instytut spilnogo investuvannya, ISI (Investment Funds) *Private investment fund (Payovyi investytsiyny fond) *Public investment fund (Korporatyvny investytsiyny fund) Both funds are run by Investment Company (KUA - kompania z upravlinnya actyvami). Funds and companies regulated and supervised by DKTsPFR (Securities and stock market state commission)


Greece

We could say that a mutual fund is a pool of money which belongs to many investors. Otherwise a M/F is the common cashier of many investors who trust a third party to operate and manage their wealth. Moreover, they order this third party which in Greece is called A.E.D.A.K. (Mutual Fund Management Company S.A.) to spread their money in many different investment products such as shares, bonds, deposits, repo etc. Those companies in Greece may provide services according to article 4 of Law 3283/2004. People who own units (shares) of a mutual fund are called unitholders. In Greece co-unitholders, which are persons participating in the same units of M/F have exactly the same rights as the unitholder (according to the Law for the deposits in common account 5638/1932). The unitholders have to sign and accept the document which describes the purpose of the Mutual Fund, how it operates, and anything concerning the Fund. This document is the regulation of the M/F. The property of each M/F by law have to be under the control of a bank legally operating in Greece (Greek or foreign). The bank is the custodian of the M/F and except of the custody of the fund also controls the lawfulness of all movements of the management company. The Supervisory and Regulatory Body of M.F. Management Companies and Portfolio Investment Companies is the
Greek Capital Market Commission The Hellenic Capital Market Commission (HCMC; el, Επιτροπή Κεφαλαιαγοράς), established as a legal entity by Greek Law in 1991 and organized by the Greek Law 2324 of 1995, aims to "ensure the protection and the orderly and ef ...
. It comes under the jurisdiction of the Ministry of National Economy and controls the operation of all M/Fs available in Greece. All investors have to be very careful and about the risk they undertake. They have to have in mind that all investments have a certain degree of risk. Risk–free investments does not exist.


Switzerland

* open-ended ** Anlagefonds (unincorporated investment fund or common fund) **
SICAV A SICAV is a collective investment scheme common in Western Europe, especially Luxembourg, Switzerland, Italy, Spain, Belgium, Malta, France, and the Czech Republic. SICAV is an acronym in French for ''société d'investissement à capital variabl ...
(Société d'investissement à capital variable) (Investment company with variable capital) * closed-ended ** Kommanditgesellschaft für Kapitalanlagen (
Limited Partnership A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited ...
) ** Société d'investissement à capital fixe, SICAF (Société d'investissement à capital fixe) (Investment company with fixed capital)


Australian collective investments

*
Listed investment company A listed investment company (LIC) is an Australian '' closed-end'' collective investment scheme similar to investment trusts in the UK and closed-end funds in the United States. Instead of regularly issuing new shares or canceling shares as invest ...
or LIC. Closed-ended collective investment either corporate or trust based. Available since 1928. *Managed Investment Vehicle per s 9 of the Corporations Act (Cth) 2001. *
Unit trust A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on ...
s open-ended trust based investments often called ''Managed funds'', ''managed investment vehicles''. or ''unlisted managed funds''. If the managed investment vehicle is open for retail investors, the managed investment vehicle must be registered with ASIC. An unregistered vehicle has a
Trustee Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to t ...
whilst a registered vehicle has a
Responsible Entity {{Refimprove, date=January 2008 A responsible entity is a peculiarly Australian invention designed to replace the manager/trustee in managed investment schemes. It was created by th''Managed Investments Act'' 1998 which made significant amendment ...
.


Offshore collective investments

*
Segregated portfolio company A segregated portfolio company (or SPC), sometimes referred to as a protected cell company, is a company which segregates the assets and liabilities of different classes (or sometimes series) of shares from each other and from the general assets of ...
, a corporate entity for holding various investments under a single legal entity.


See also

*
Closed-end fund A closed-end fund (CEF) is a fund that raises capital by issuing a fixed number of shares which are not redeemable, and then invest that capital in financial assets such as stocks and bonds. Unlike open-end funds, new shares in a closed-end fund ...
*
Collective trust fund Collective trust funds or Collective Investment Trusts (CITs) are a legal trust administered by a bank or trust company that combines assets for multiple investors who meet specific requirements set forth in the fund’s declaration of trust. Typ ...
*
Common fund A common fund is a form of collective investment scheme based upon contractual law rather than being enacted through a trust, corporation or insurance policy. The model for this type of arrangement is the Fonds commun de placement common in Fran ...
*
Fund derivative A fund derivative is a financial structured product related to a fund, normally using the underlying fund to determine the payoff. This may be a private equity fund, mutual fund or hedge fund. Purchasers obtain exposure to the underlying fund (or ...
*
Fund governance Fund governance refers to a system of checks and balances and work performed by the governing body (board) of an investment fund to ensure that the fund is operated not only in accordance with law, but also in the best interests of the fund and its ...
*
Global assets under management Global assets under management consists of assets held by asset management firms, pension funds, sovereign wealth funds, hedge funds A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensiv ...
*
Independent financial adviser Independent financial advisers (IFAs) are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the ''whole of the market''. The term was developed to reflect a United Kingd ...
*
Investment management Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institut ...
*
Mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
*
Offshore investment Offshore investment is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are used to pay less tax in many countries by large and small-scale investors. Poorly regulated offshore domiciles have ser ...
*
Open-end fund Open-end fund (or open-ended fund) is a collective investment scheme that can issue and redeem shares at any time. An investor will generally purchase shares in the fund directly from the fund itself, rather than from the existing shareholders. ...
*
Separately managed account In the investment management industry, a separately managed account (SMA) is any of several different types of investment accounts. For example, an SMA may be an individual managed investment account; these are often offered by a brokerage firm th ...
*
Specialized investment fund A specialized investment fund or SIF is a lightly regulated and tax-efficient regulatory regime in Luxembourg aimed for a broader range of eligible investors. This type of investment fund is governed by the Luxembourg law of 13 February 2007 repl ...
*
Undertakings for Collective Investment in Transferable Securities Directive 2009 The Undertakings for Collective Investment in Transferable Securities Directive (UCITS2009/65/ECis a consolidated EU directive that allows collective investment schemes to operate freely throughout the EU on the basis of a single authorisation fro ...


References


External links


Answers
U.S. SEC Investment Companies, Consumer Information {{Authority control Dutch inventions