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What Is an Investment Fund?

10 27 2016

We discuss the definition of what an investment fund is & why you should consider one to help diversify your portfolio. Contact our finance experts today.
We're all looking for ways to achieve meaningful and measurable returns for our portfolios. The reasons are as unique as we are - no two investors are alike.

Retirement is on the horizon, your daughter's wedding is next year, or that first tuition bill is just around the corner.

That's why you need investments that effectively balance risk and reward; the very reason investment funds have become an important part of building a balanced portfolio.

So how exactly do they work, and which fund is best for you?

We all know the general rule of thumb: don't put all of your eggs in one basket. That's exactly what investment funds help protect against.

In an investment fund, your capital and other investors' capital is pooled together into a group fund, which is run by a fund manager. The shared capital funding allows your investment to be spread among a wider range of assets. This diversification helps lower risk. And the economies of scale created by this group fund help reduce transaction costs for investors.

There are countless investment funds available to put your hard-earned money to work for you. Here are three proven options to help achieve better diversification for your portfolio in today's uncertain financial markets:

  1. Real Estate Investment Trust (REIT): A REIT is a company which invests in a variety of income-producing property on behalf of both large and small investors. REITs can own both residential and commercial property such as shopping malls, office buildings, and warehouses. Shareholders receive any taxable income produced by the REIT's real estate holdings in the form of dividends. REITs appeal to investors because they feature high dividend yields, stock market diversification and long-term capital appreciation.

  2. Mutual Fund (MF): A mutual fund allows investors to purchase a collection of stocks, bonds, or other securities. It allows investors to reach a level of diversification that most wouldn't be able to achieve on their own by buying individual stocks and bonds. It is typically actively managed to try to beat the performance of an index like the S&P 500. A MF can be traded only after the close of trading each day. It has a minimum holding period and there are penalties for selling early. Fund holdings are disclosed quarterly, and average annual expenses are 1.42%. Capital gains taxes are incurred immediately on MF trades so they impact your taxes each year.

  3. Exchange Traded Fund (ETF): An ETF is a collection of securities sold on the exchange and offer exposure to specific areas of the market. This is similar to mutual funds, but there are a few key differences. First, the fund is passively managed and typically tries to match the returns and price movements of an index such as the NASDAQ. Second, ETFs are on the exchange and can trade anytime the market is open. Third, there is no minimum holding period and fund holdings are disclosed daily. Finally, average annual expenses for an equity ETF are lower (0.53% on average) because they're not actively managed. And trades typically occur between investors, which means greater tax efficiency due to fewer taxable events. In fact, capital gains in ETFs are not attributed until the assets are sold with the complete fund.

The simple truth is: it's up to you to decide how best to allocate your hard-earned money as you look to the future. Mutual funds and ETFs offer benefits for the typical investor looking for opportunities to diversify in global financial markets. But for those looking to diversify while avoiding the volatility of today's financial markets, a REIT can provide real and measurable returns backed by real estate.

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