One will never become rich and wealthy by just saving a part of monthly income. The key to financial success is always investments, whether it’s a short-term or a long-term investment. Along with other types of investments, funds have its advantages and benefits, especially when it comes for sums about 1000-5000$.
Investing in any type of fund means the investor joins the group (sometimes up to few thousand investors) of other individuals who put their money into the fund in order to earn the profit.
All funds have managers – professionals who build investment portfolios and “rule” the clients’ money. They decide where to invest, what share of the whole portfolio goes to stocks, bonds, and other low-risk and high-risk investment vehicles.
Prior to signing an Agreement with the Fund that you have chosen, you should discuss with the manager what type of investing you prefer and what degree of risk (and investment is always about risk) you are ready to accept. Always keep in mind: whatever the successful and trustworthy the Fund is, there is always a probability of losing the money due to unlucky deals or professional mistakes.
The profit resulted from these investments, is shared among all investors in accordance with the share each investor brought into the whole portfolio. The manager earns his commission mentioned in the Contract.
There are several main types of funds Americans may invest in regardless the amount of money they intend to put into work:
Types of Funds:
First of all, you need to understand what indexes show and tell, and how to understand indexes in order to earn the money. Generally speaking, indexes show the “moods” of markets – the directions markets go. Like with other financial tools, buying indexes on the uptrend and selling before it starts falling down, makes the profit. The concept is simple and Index Funds offer a broad range of indexes to earn on (S&P 500, Russell 2000, DJ Wilshire 5000 etc.).
Closed-end funds are, probably, the least known type of funds by the majority, while close-end funds have significantly bigger potential in terms of earning the profit for its investors. Closed-end funds issue shares and put papers on a stock exchange to trade. The portfolio of the fund is managed by professional managers and, depending on whether the portfolio is profitable, the shares either go up or down.
A potential profit which investor may earn is massive, but on the other hand, the risks are greater (comparing to investing in other types of funds) as well due to intense price volatility. This type of investment is considered a high-risk investment and the investor must me psychologically ready to lose a considerable part of an investment in the event of an unlucky deal.
Hedge Fund is a “top dog” among all other types of funds and historically hedge funds are the most attractive investment vehicle for wealthy and knowledgeable investors. Hedge funds offer profound profits and require massive investments to make, so if you are having less than few hundred thousands of dollars it is better to redirect your attention into other funds. Hedge Funds are out of Exchange Commission and U.S Securities regulation for now which brings additional risks to potential investors. Nevertheless, Hedge Funds are so attractive for a reason – the return on investments made is usually outstanding.
Hedge Funds can operate by the broadest range of securities and, unlike mutual funds, are not limited in types of securities by regulations.
Due to Hedge Funds being allowed to use leverage in trading, even the relatively modest sums of investments may bring astonishing profits. It needs to be told that new and unsophisticated investors have little to zero chances to start cooperating with top and high-quality hedge funds.
Mutual Funds are the most common and popular type of funds to invest, especially when it comes to small private investments. Actually, the purpose of mutual funds is to collect investments of different sizes from numerous private investors who are willing to create mutual pool and trade with the bigger money in order to share the taken profit.
The manager who manages the portfolio is responsible for the profit (and for the loss as well), so before jumping into investing with the particular mutual fund you should discuss the preferable strategy to find out whether it suits your financial goals and willingness to take risks.
Types of Mutual Funds:
– Fixed Income Funds
These are fixed-rate of return investment tools like high-yield corporate bonds and (the safer ones) government bonds. Fixed Income Funds offer fixed profit to the investors, and that implies the less risk comparing with equity funds or hedge funds.
– Equity Funds
The main tool the Equity Fund invests in – is stocks. Since investing in stocks is considered a high-risk investment, you should be willing to take that risk if you wish to receive the bigger profit. Due to somewhat unpredictable behavior of stock exchange and high volatility (especially when it comes to shares of startups rather than “blue chips”) the risks and potential profits are both high.
– Money Market Funds
With this type of fund, you will invest in such tools as treasury bills, government bonds, certificate of deposits (CFD’s) and other fixed-income securities. These investments are considered low-risk ones and hence – low income investments. Money Market Funds are excellent for those who prefer safe investments with almost zero risk.
– Balanced Funds
Balanced funds use a mix of different equities and financial tools to invest in order to balance the risk/returns ratio. Usually, the portfolio consists of many different types of financial vehicles where the proportion and share of each tool are calculated based on a special formula in order to achieve the highest profits putting the money under the lowest possible risk.
– Specialty funds
These funds are quite specific in picking investment tools. The portfolio of specialty funds consists of commodities and real estate mainly.
Exchange Traded Funds (ETF)
Unlike other types of funds, Exchange Traded Funds own stocks, bonds, futures and other underlying assets and then share the ownership. Divided assets are put into shares and given to shareholders who earn the profit in accordance with the assets’ value and dividends. In this manner, shareholders could be considered co-owners of assets owned by the particular ETF.