What are investment funds

investment funds

Investment funds (in English: Investment Funds/Mutual Funds) are one of the investment tools that are managed by people specialized in the financial market, and contribute to increasing capital by selling shares called units within a group of securities, and investment funds invest The capital is in a common package called a portfolio, which brings together securities, products and other things that are compatible with the fund and appear in the prospectus.

Investment funds are also known as an investment program that relies for its financing on a group of shareholders who trade in various properties, and these funds must be managed in a professional manner. Another definition of investment funds is a financial service that depends on the presence of financial experts. To invest private funds in individuals within more than one diversified company.

Types of investment funds

Investment funds are divided into a group of types, namely:

• Investment funds with periodic returns(In English: Income Funds), also known as income funds, are funds that are interested in investing in instruments with fixed financial returns that are distributed on a regular basis, examples of which include bonds that suit the needs of investors in portfolios who want to obtain periodic returns with a small percentage. It's risky.
• Growth capital investment fundsGrowth Funds: (in English: Growth Funds), which are funds that invest in stocks that are characterized by their capital growth over a long-term period of time. This type of fund is suitable for investors who want to deal with long-term investments.
• Balanced mutual fundsBalanced Funds: (in English: Balanced Funds), which are a type of investment funds that seek to achieve goals, such as obtaining profits and moderate growth of capital while maintaining it. These funds are suitable for moderate investors who want to obtain appropriate financial returns while having moderate risks.
• Impulsive investment policy funds: (In English: Aggressive Funds), which are funds similar to capital growth funds, but they invest in securities with a high percentage of risk. With the aim of achieving higher financial returns for investors, these funds are considered suitable for the investor who tolerates high levels of risk.
• Index boxes(In English: Exchange Traded Funds), known by the abbreviation symbol (ETFs), are a type of investment funds that rely on investing in a group of stocks, which are characterized by a high index on the stock market (stock market).
• Money market funds: (in English: Money Market Funds), which are short-term investment funds; Because it uses short-term financial instruments, such as treasury bills and savings certificates whose maturity period reaches the equivalent of three months. That is, 90 days, and these funds are often suitable for investors who want to maintain high levels of financial liquidity.
• Islamic investment fundsIt is a group of investment funds that invest in financial assets in accordance with Islamic legislation, and is supervised by a committee within the financial institution responsible for managing the fund.

How investment funds work

Investment funds rely on applying their own method of operation through a set of steps, including:

• Financial companies collect money from investors, and then invest it in bonds and stocks in the short term in the financial market.
• Use of instruments and securities within investment funds.
• Investment portfolios are managed by a board that relies on an investment advisor, and each fund represents private ownership in the investor.
• Granting investment fund owners the right to buy and sell their shares; Whether by dealing directly with the fund owner, or through the presence of investment experts such as financial brokers.
• Placing a financial value on shares every working day, which is an obligation for every shareholder in an investment fund.

Advantages and disadvantages of investment funds

Investment funds are affected by a group of advantages and disadvantages, and are divided according to the following:

• Advantages of investment funds: Among the special characteristics of these funds, the most important of which are:
  • Diversity: That is, investment funds provide a basket of diverse securities that contribute to diversifying the contents of the investment portfolio.
  • The effectiveness of small accounts: Mutual funds provide many types of stocks, which helps investors with small capital buy stocks appropriate to the size of their investments.
  • Professionalism in money management: Investment funds are managed by relying on investment managers who have experience in this field, and companies specialized in managing mutual funds rely on them.
• Disadvantages of mutual funds: These are among the characteristics of investment funds, the most important of which are:
  • There is no real-time trading in investment funds: that is, the investor cannot follow trading in these funds at every moment. Because the trading market closes at the end of the working day, which makes it difficult to benefit from unexpected changes in the financial market.
  • Subjection to tax: That is, investment funds that distribute their profits once a year are also subject to the value of the tax resulting from them, even if the investor does not receive any profits during the year, but he must pay the value of the tax after collecting the value of the capital gains.
  • Participation with the group: This means that if the investor is committed to the investment transactions, this will not lead to any concern in the event of fluctuations in the financial market, but in the case of joint investment funds between more than one investor, the possibility of one of the investors declining or defaulting appears, which leads to negative results. It affects the performance of the fund and all investors, not just one investor.
  • Costs: That is, investment funds in general depend on the presence of costs in all cases affecting them, and these costs often lead to a reduction in the investor’s private financial returns; Therefore, investment fund expenses must be limited during the year, or those expected in the coming period of time.