An investment fund is a way of investing 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, which may potentially be able to offer better returns and more adequate risk management;
  • benefit from economies of scale, 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). An investment fund may be held by the public, such as a mutual fund, exchange-traded fund, special-purpose acquisition company or closed-end fund,[1] or it may be sold only in a private placement, such as a hedge fund or private equity fund.[2] 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.[3]

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.

See also