Investors seeking to diversify their portfolios and achieve higher returns with less risk often find it challenging to navigate the wide range of investment instruments available and manage their investments effectively.

 

At this point, investment funds offer a shortcut to a diversified and professionally managed portfolio, making them a popular choice for investors of all levels. However, understanding the advantages and disadvantages of these funds is crucial before investing.

 

What Are Investment Funds, and How Do They Work?

 

Investment Fund Investment

An investment fund is a type of investment where multiple investors pool their funds into a common pool with the goal of diversifying their portfolios to reduce risk and potentially achieve higher returns than they could individually.

 

These funds have high liquidity and are managed by professional financial managers who diversify their portfolios among various types of securities, typically including stocks, bonds, or other securities, according to the fund’s investment objectives.

 

Only capital market institutions authorized by regulatory bodies have the authority to establish investment funds. These companies primarily create an Umbrella Fund that gathers various investment funds under one administrative structure.

What Is an Umbrella Fund, and What Are Its Types?

Types of investment funds

An umbrella fund is an investment vehicle that allows multiple sub-funds to operate under a single administrative structure.

 

Some of the types of umbrella funds that portfolio management companies can create include:

 

Fixed-Income Instruments Fund: This type of fund focuses on investments in debt instruments such as bonds and notes.

 

Equity Fund: This fund invests in local or international equities.

 

Precious Metals Fund: This fund invests in precious metals like gold, as well as securities based on their value.

 

Fund Basket: This fund invests in other investment funds, expanding the overall market volume of participation funds.

 

Money Market Fund: This type of umbrella fund invests solely in money and capital market instruments with a maximum maturity of 184 days. The portfolio is calculated daily, and the weighted average maturity does not exceed 45 days.

 

Participation Fund: This fund invests exclusively in financial instruments not based on interest rates.

 

Variable Fund: A fund type where the constraints on the portfolio do not fall within the limits of the aforementioned portfolio types.

 

Free Fund: An umbrella fund type that covers funds intended to be purchased by qualified investors who meet specific criteria.

 

Guaranteed Fund: A fund type that commits to returning a portion, all, or exceeding the initial investment with a specific return at specified time intervals through a guarantor.

 

Protection-Purpose Fund: A fund type that commits to returning a portion, all, or exceeding the initial investment with a specific return at specified time intervals through best-effort basis.

Things to Consider in Investment Fund Investment

When it comes to investing in investment funds, there are several important factors to consider before making a decision. By dedicating time to analyzing these factors individually, you can enhance your ability to select a fund that aligns with your investment goals and risk tolerance, potentially providing a solid return over the long term.

 

Let’s take a closer look at the key aspects to consider when making decisions about these funds.

 

Fund Objectives and Management Strategies: Understand the investment objectives and strategies of the fund and compare them to your own investment goals and preferences. Make sure you invest in a fund portfolio that aligns with your expectations.

 

Fund Performance: Track the fund’s performance over a specific time period through a financial partner like Foreks Trader and compare it with similar funds in the category. However, remember that past performance does not guarantee future results.

 

Fund Management: The fate of a fund is determined by the portfolio management activities conducted by fund managers. Therefore, research the fund manager and management team before choosing a fund. Evaluate their experience and competence.

 

Fund Expenses: There are various expense elements in fund investment, including management fees and other operating costs. These costs can significantly impact the returns of the fund over time. Research these expense items and ensure they remain within acceptable limits.

 

Portfolio Diversification: To minimize risks, ensure that the fund is well-diversified and not excessively concentrated in a particular sector or security. Regularly monitor the portfolio diversification and asset allocation.

Risks of Investment Funds

Investment funds for investors

An investment fund is considered relatively low-risk as it allows professional managers to invest in a wide range of securities, reducing the impact of the poor performance of any single security on the overall fund value. However, it’s important to note that diversification does not completely eliminate risk. The value of an investment fund can still decline if the value of the securities it holds drops. Additionally, investment funds are subject to market risk, which means they can experience losses if the overall stock or bond market declines.

 

For each fund, there is a mandatory investor information document available through the Capital Markets Board (KAP), which provides information on the fund’s risk level. Investors can use this risk value to assess the potential risks of the fund and compare them to their own risk tolerance.

 

In conclusion, diversification does not eliminate risk entirely. When evaluating the risk of an investment fund, factors such as tracking the fund’s historical performance using tools like Foreks Trader, observing the competence of the management team, and analyzing expenses should all be considered.

Returns from Investment Funds

The returns you obtain from investment funds vary depending on the type and purpose of the fund. Funds managed by a qualified team of managers often yield significant returns due to the impact of well-informed investment decisions. However, fund managers have the responsibility of ensuring guaranteed gains over the long term.

 

For investors looking to achieve significant gains in the short term, it may be necessary to conduct thorough research on the fund and its management team and, if necessary, diversify into different investment instruments.

 

How to Invest in Investment Funds?

The way to enter an investment fund is by purchasing the participation shares of the relevant fund. To do this, you need to open an investment account. Once you have an investment account, you can buy and sell fund participation shares through the fund’s own institution, brokerage firms, or banks.

 

When an investor wants to trade shares in an investment fund, they do so based on a value derived by dividing the calculated total value of the fund’s assets by the number of outstanding shares.

 

Which Investors Are Suitable for Investment Funds?

Investing in investment funds

As an investment vehicle, investment funds are attractive to individuals and institutions with diverse needs and expectations due to their advantages and a variety of options.

 

Investment funds can be a good choice for investors who:

 

Have a long-term investment horizon.

Are new to investing and seek a diversified investment portfolio managed professionally.

Have limited resources for investing in individual stocks or bonds.

Seek the benefits of professional fund management to achieve their investment goals.

In summary, investment funds are versatile and can meet the needs of a wide range of investors, from those with long-term goals to those with limited resources or those seeking professional diversification.