What is an investment fund?

Investment fund

An investment fund (formerly a trust fund) is a financial entity that invests the funds entrusted to it by investors. Investment funds are formed by investment fund companies which, as their governing bodies, manage them and represent them in relations with third parties.

Depending on the type of fund, investors receive participation units or investment certificates in exchange for contributions to the fund. Changes in the value of units or certificates, which can be observed on an ongoing basis in newspapers or on financial websites, show how the value of invested funds changes.

Completion of the investment is achieved by selling the fund’s participation units or investment certificates on the stock exchange. This is the case with the thesauri funds, i. e. those re-investing all income of the fund on an ongoing basis. There are also dividend funds that can pay their participants income without buying participation units or investment certificates.

The basic issue in the case of investment funds is the fact that their activity is strictly defined by the legal regulations – the Act on investment funds, together with relevant regulations. This is important for the security of the resources entrusted. Firstly, the fund is a separate asset from the company that created it.  In the event of a company’s financial difficulties, investors’ funds are not at risk as they are not part of its assets.

Secondly, the fund’s investment activities are subject to a number of regulatory constraints, which inter alia prevents managers from taking excessive risks.

Thirdly, the Securities and Exchange Commission supervises the operations of investment funds. It takes the form of an obligation to provide the Commission with periodic reports and current information on the activities and financial situation of the Funds and the possibility for the Commission to carry out audits at the Fund’s premises.

In countries with developed financial markets, investment funds are a very important part of the financial system. In the United States, for example, there are more than 5 000 different types of funds, whose total assets are counted in billions of dollars.

Advantages and disadvantages of investing in investment funds

The main advantages of investing in investment funds are as follows:

  • Safety, security
  • Reduction of risk by diversification of investments
  • Quick access to own resources, and
  • Professional management, professional management
  • Possibility of investing relatively small amounts
  • Representation of investors in the financial market, – Financial Market Representation
  • High income in relation to other deposits, – high income
  • Tax benefits.

Choosing an investment fund: