An investment fund is a fund in which multiple parties invest their resources to gain advantages in investment and trading world. There are three key benefits of the investment funds over individual traders and investors. First one is the economy of scale (lower costs of transactions). Then we have the visible increase of the asset diversification and the decrease of the risk. At the end is the ability to hire expensive investment managers that can offer better returns and people who know how to manage risk factor in the investment world.
Before we continue with the explanation of the intricacies of the investment fund, we must mention that this type of grouping doesn’t work for binary options market. If you want to trade binary options then click to Top 10 Binary Demo for more information about that subject.
Now, every investment fund has to have a structure as the fund must be legal and formed under the hand of the law. Every fund has to have an investment manager whose job is to manage all decision regarding the investments. They must be able to discern good from bad business decisions and impose their decisions on the investors. A fund administrator controls all trading, pricing and other decisions regarding the actual work with the investments. A board of directors is there to protect the assets and to ensure that every move the fund makes is according to law and regulations. Unitholders are all people who have rights to the assets that compose the investment fund. Every fund has a group of individuals (sometimes it is an off-fund company) that distribute the shares of the investment fund.
An investment fund has its advantages, but there are also some disadvantages connected to the investment fund scheme.
– The primary use of this type of investments is the risk and the diversity. The risk of the investment is reduced, and the variety of the assets is substantially increased. Diversification of the investment on multiple assets is a technique known as spreading risk. The potential for great loss is almost nullified with the investment in different assets.
– The amount of resources pooled into the fund reduces the costs of dealing with a broad range of investments. An individual has to pay a lot to cover that amount of investments, but the number is negligible when there is a large fund backing those investments.
– The obvious downside of the investment fund is the cost. The people that pool the resources don’t have the skill or the knowledge to perform successful investment. The fund manager they hire will work for remuneration. The advice the capital needs comes from a financial adviser who also doesn’t work for free. The payments either come in a single payment form or the percentage of the return. In either way, those expenses are not small.
– The investor can’t decide the holdings of the fund they invest in which is a disadvantage for some people.
– The investor can have rights only if they hold shares of the fund. If they don’t own any shares, then they don’t have any rights within the fund.