An investment fund is often described as a basket of shares (or other financial products). When you participate in an investment fund, an investment fund manager invests your money for you. They will analyse the stock market and buy or sell in the fund, based on the outcome of their research. Funds can invest within a theme, such as emerging markets, or for example, the fund can have a focus on a specific geographical region. A combination of different investment categories is also possible.
Investment funds have stocks of several companies in its portfolio. So, if you participate in such a fund, you automatically invest in several companies at the same time. The advantage of a large spread is in regard to diversification. When one stock has a disappointing return, this has a limited influence on the return achieved by the complete fund. On the other hand, positive outliers can also have a limited influence on the overall result.
The fund manager determines the composition of the fund. He or she determines which shares to invest in. As an investor (or participant of the fund), you have no influence on the composition yourself. In the European Union, it is a legal requirement for a fund manager to provide a Key Investor Information Document (KIID). This information is often available on the website of the relevant fund. The document describes the most important information, such as the composition of the fund, the costs, the past performance and the distribution percentages. It can be essential to make a well-considered decision when choosing an investment fund. Sometimes, for example, a minimum investment is required to join an investment fund. If this applies, it is clearly stated on its website.
Investment funds can be open-ended and closed-ended. Typical for an open-end fund is that the fund manager is only allowed to expand the basket of shares when new money arrives. Open-end funds always note the net asset value. The vast majority of investment funds are open-ended. In contrast, the number of shares is fixed for closed-end investment funds. The price is then determined by the supply and demand in the fund. When placing an order for a closed-end investment fund, it is important to determine in advance how much you are willing to pay or wish to receive. A limit can be specified if desired.
Investment funds are typically actively managed by a fund manager, which comes at a price. These costs are included in the price of the investment fund. Most of them charge between 0.5%-2.0% on an annual basis. The exact costs are stated in the KIID and the Prospectus. In addition to the intrinsic costs, your broker charges transaction costs for the purchase and sale of your position. You pay one-off transaction costs and you do not pay for each individual share. Some brokers also charge management fees.
There are many different types of investment funds. Some of the main ones are equity funds, bond funds, mix funds, hedge funds and index funds. Below are short explanations per type of fund, so that you can compare the various types.
Participating in an investment fund can be beneficial, but it is not without risk. At DEGIRO, we are open and transparent about the risks associated with investing. When an investment fund is well spread, the risk is often relatively limited. However, investing always involves risks. Please note that most investment funds are not traded often. For most funds, this is once a day, but some funds trade once a week, once a month or even less. Oftentimes, your order must be given a day in advance for a certain time to be taken at the next day's trading time. The time at which your order must be placed depends on your broker. You can find the exact time when trading the fund can be found in the Fund's KIID.
DEGIRO offers funds from many different fund houses. Some well-known fund houses are:
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.