INVESTMENT FUNDS FOR BEGINNERS (PART 3)

After our first article on funds for beginners, followed up by a second instalment, this article will carry on the series on investment funds.

Nothing written here should be considered formal tax, financial, legal or any other kind of advice advice, and is written for entertainment purposes only, in other words isn’t a solicitation to invest.

For any questions, or if you are looking to invest as an expat, you can contact me using  this form, or use the WhatsApp function below.

Other Fund Definitions:

Having said this about the most important types of funds related to investment, let us now have a look at some other types of funds, which are also related to investment. 

Most of you might already be familiar with such types of funds, yet there might be a chance that some won’t know these. Not just funds, but we will also see some other aspects that are closely related to funds (investment). 

Some of the below-mentioned topics might be correlated to the topics that we discussed above. Yet, by learning about those terms as well, you can have a firm understanding of the topic by avoiding confusion.

Balanced Funds:

The name itself speaks for the definition of Balanced Funds. These types of mutual funds invest the pooled money equally into equities and fixed income assets. The whole idea of creating such a fund is to obtain higher profits while minimizing the risk. 

In most cases, these funds use a strategy for splitting the money before it is invested into diversified assets. These involve risk, which is lower than equity funds and higher than fixed income funds.

Balanced funds following an aggressive strategy would invest more in equities and less in bonds, whereas funds opting for a conservative strategy invest more in bonds and less in stocks.

Specialty Funds:

In layman’s terms, Funds or mutual funds that invest in a specific industry, sector, or region would be referred to as specialty funds. These funds concentrate on specific asset classes such as Real Estate, Commodities, Socially Responsible Investing (SRI), etc.

For instance, a socially responsible fund will invest the money in the stocks of companies that contribute towards the environment, human rights, etc.

As there won’t be a required amount of diversification in these funds, specialty funds are considered a risky investment.

Fund-of-funds:

These funds invest the pooled money into other funds. By doing so, the asset allocation and diversification of the portfolio is done in a smooth way (for the investor).

However, the management expense ratio is generally higher for fund-of-funds when compared to traditional mutual funds. 

Ethical Funds:

A mutual fund that invests money into assets while abiding by the ethical principles of an investor is known as an ‘Ethical Fund’. An index fund that tracks the benchmark index of ethical funds is called an ‘Ethical Index Fund’.

Ethical investing may also be referred to as ‘Socially Conscious Investing’. These funds follow some specific guidelines on the investment process, which follow the ethical principles of an individual.

In most cases, ethical funds may not provide good returns on the invested money as the performance of these funds a bit lower than that of traditional funds or index funds.

Mostly, ethical funds avoid investing in companies dealing with businesses related to Tobacco, Alcohol, Gambling, Weapons, etc.

To know more about Ethical Investing, click here.

Shariah-Compliant Funds:

Shariah Compliant funds invest into assets while following the principles of the Islamic religion and the rules of Shariah law. Shariah-compliant funds are a type of socially responsible investment.

These funds vary a lot in contrast to the traditional investment methods because they have some specific requirements such as appointing a Shariah board, avoiding investing in companies related to Alcohol, Pork meat, Gambling, etc.

To know more on Shariah-compliant investments, click here.

Socially Responsible Investment Funds (SRIF):

There are many names for this type of investment strategy such as Socially responsible investing, social investment, sustainable socially conscious, green investing, ethical investing, etc.

The funds that opt for this type of investment strategy usually want profits while doing some good for social and environmental aspects. 

These funds invest in the companies promoting environmental stewardship, human rights, gender diversity, racial diversity, and other similar environmental and social concerns.

These funds do not invest in companies involved with businesses related to alcohol, fast food, tobacco, pornography, weapons, fossil fuel products for the military, etc.

The socially responsible investment funds, which can be mutual funds or ETFs, usually concentrate on the principles of ESG investing, which stands for Environment, Social Justice and Corporate Governance.

Debt Funds:

Debt Funds are nothing but the fixed-income funds that we discussed earlier in this article which invest in bonds, treasuries, and other fixed-income securities. Debt Funds can be interchangeably used with Bond Funds as both are very similar.

Some of the investment instruments in which the money is invested are Gift Funds, Liquid Funds, Short-Term Bonds, Long-Term Bonds, Monthly Income Plans, Fixed Maturity Plans, etc.

As the income obtained from these funds is regular, these funds could be considered an optimum investment opportunity for passive investors who want regular income with minimum risk. 

As the risk is low, the returns obtained from these funds is also comparatively low.

Open-End Funds:

Open-End Funds or Open-Ended funds do not come with a specific timeframe or the number of fund units that can be traded. These funds come with built-in flexibility so that investors have the advantage of cashing out their investments whenever they want (as per the prevailing Net Asset Value). 

This is the most important reason for these funds to experience a consistent change in the capital, which is because of the entries and exits. 

An open-traded fund can decide whether to accept new investors to participate in the investment or not (at any given time). 

Closed-End Funds:

In Closed-Ended Funds, the capital required to invest in a fund unit is predefined. This means the fund company would not be able to sell more units than those that were pre-agreed.

Some funds may even come with a ‘New Offer Period (NFO)’, where there exists a deadline to purchase the fund units.

There is also a maturity period for the New Offer period that is pre-defined by the fund manager regarding any fund size. 

Therefore, in some countries, regulatory authorities make it a mandatory necessity for the investors to either repurchase or list the funds on a stock exchange before they could exit the fund scheme.

Interval Funds:

Interval Funds have the characteristics of both open-end funds and closed-end funds. 

These funds are open for both sale and purchase during particular time intervals as decided by the fund company while being closed during the remaining time.

Investors won’t be able to make transactions for a specific period based on the terms of the fund company. Interval funds are optimum for wealthy investors who want to save a hefty amount for a short-term such as 3-12 months.

Growth Funds:

Growth funds invest a large portion of the pooled funds, if not all, into stocks and other growth assets. These could be considered an ideal option for investors who are still young and have higher risk tolerance.

Having a higher risk tolerance means the person should be able to deal with consequences if there was any loss in the investment. This would imply that the chances of losing money with these funds are significantly higher.

With great risk comes great profit!!! Yes, not just the risks are heavy in the growth funds, the profits are significant as well. 

Income Funds:

Income funds are like debt mutual funds, which we have discussed earlier. These invest in bonds, treasuries, CDs, etc. these are managed by professional wealth managers who handle the portfolio in such a way that the volatility is kept in check. 

Over many years, income funds have been proven as a profitable investment compared to bank deposits while having a similar level of security.

Liquid Funds:

Similar to income funds, liquid funds also come under the category of debt funds because most common investments include debt investments, money market investments, etc., for a period of around 3 months in general.

Usually, there would be a limit for the maximum amount that can be invested into these funds. 

The major difference between liquid funds and other debt funds is that liquid funds calculate the net asset value while including the weekends as well. In the case of other debt funds, only the business days are considered while calculating the NAV.

Aggressive Growth Funds:

These are the Growth Funds that involve a higher level of risk while providing maximum returns on investment. However, these funds are subject to higher volatility compared to other funds.

Capital Protection Funds:

The main purpose of these funds is to preserve the principal invested by an individual. Similar to most conservative funds, a large proportion of the capital is invested into bonds, CDs, etc., and the remaining is invested in equities.

Even though the probability of losing money with these funds is very low, the investors would be required to stay invested for a period of at least 3 years or so.

One major aspect that should be taken into careful consideration is that the profits arising from these funds are taxable.

Pension Funds:

Pension Funds, as the name itself makes it clear for us to understand, are the funds that pool money from employees for their retirement. Pension Funds gather the capital investment from employees or employers, or sometimes both. 

Almost all government organizations (regardless of the sector or region) offer pensions. There are some private organizations as well, which contribute towards the pension plan of an employee.

Organizations or companies usually reduce the risk involved with these investments by depending mostly on fixed-income assets. The actual returns obtained from these funds might be lower than what has been speculated.

There are two kinds of pension funds, among which, the first type is the traditional pension fund which is also known as ‘Defined Benefit Fund’ that comes into most people’s minds when we talk about the pension. With the help of these, people get the same guaranteed amount every time. 

Additionally, the second type is the ‘401(k) plan’, which is also familiar to most people. The payout from this plan would vary depending on the performance of the fund.

Defined Benefit Fund – Beneficiaries are paid a fixed amount with the help of these funds, which does not rely on the performance of the fund for paying the individuals. 

First, the employee would pay a fixed amount into the fund, which is invested by the fund managers in a conservative manner. The fund managers should aim for enough returns so that the investors would be paid.

Moreover, these fund managers would have to invest in such a way that they could beat inflation without losing the actually invested amount. 

The employer, on the other hand, acts as an insurance provider and pays whenever there is a shortage of the required capital. In layman’s terms, whenever there is a risk related to the invested capital such as a drop in the market, the employer should sustain the risk. 

Due to this risk, most private companies all over the world stopped offering these plans to their employees. 

In the United States, the Pension Funds can be single-employer pension plans or multi-employer pension plans. What we discussed so far comes under single-employer pension plans.

When it comes to multi-employer pension plans, small companies could group together and create a diversified pension. By doing so, employees could acquire pension-related benefits even if they change from one company to another. 

According to the stats obtained in January 2021, there are around 10 million employees (retired or currently working) that are benefitting from the multi-employer pension plans.

Most of the people involved with the multi-employer pension plans would face difficulties in the US in the nearby future. Why? Because these funds would run out of money to pay the individuals.

Both single-employer pension plans and multi-employer pension plans are guaranteed by the Pension Benefit Guaranty Corporation of the Federal Government. The pension of around 35 million workers is dealt with by the PBGC, among which, the single-employer pension plan covers 28 million individuals.

It means 3 million multi-employer pension plans may face financial hardship by 2025 and would run out of money by 2040.

Defined Contribution Plan – In a Defined Contribution Plan, the benefits obtained by an employee are based on the performance of the fund such as a 401(k) account. The employer won’t have to indulge when a fund experiences a loss.

Only the employee would have to face the existential risks with these pension plans/funds. The major difference between a defined benefit fund and a defined contribution plan is the decrease of value in the fund.

Noteworthy aspects – somewhere around the 1980s, many organizations and companies noticed the potential advantages (to them) of defined contribution plans. 

Due to this, the count of employees that were covered by guaranteed plans experienced a gradual decrease. However, government plans such as social security stayed on their track while opting for the benefit plans.

Nevertheless, many payouts decreased and became insufficient to cover for the individuals to have a decent standard of living (in many countries).

Pension Funds came on to the verge of being completely obliterated during the financial crisis of 2008. From then onwards, most large-scale funds started opting for fixed income assets rather than investing riskier assets such as stocks.

Because of the demand caused by this, the liquidity of some of the largely admired bonds decreased and made it hard for buying them. 

Due to this, the interest rates were kept low, even after the situation of the crisis was taken care of by the Federal Reserve.

Most of the municipalities are dealing with a drastic shortage in the shortfalls of pensions. For instance, if we observe the situation of Chicago, four pension funds are experiencing a shortage of around $30 billion which is required to pay the employees that are going to retire in the future.

The amount is actually considered 5 times greater than the annual budget of Chicago. Due to this, many credit rating agencies gave Chicago a very poor credit rating. 

In order to cope with this situation, Chicago has to increase the interest rates on the municipal bonds to attract more investors as there is a lot of risk involved.

Top 10 Public Pension Funds – Having discussed all the important information regarding pension funds, let us have a look at some of the largest public pension funds in the world based on their total assets.

  • Social Security Trust Fund

Country: United States

Total Assets: $2.9 trillion

Investments: US Special Treasuries

  • Government Pension Investment Fund

Country: Japan

Total Assets: $1.5 trillion

Investments: 55% Japan-based bonds

  • Military Retirement Fund

Country: United States

Total Assets: $813 billion

Investments: Diversified Portfolio

  • Federal Employees’ Retirement System

Country: United States

Total Assets: $687 billion

Investments: Diversified Portfolio

  • National Pension Service

Country: South Korea

Total Assets: $609 billion

Investments: Korean assets

  • Federal Retirement Thrift Investment Board

Country: United States

Total Assets: $572 billion

Investments: N/A

  • Zenkyoren

Country: Japan

Total Assets: $523 billion

Investments: Agricultural assets

  • Stichting Pensioenfonds ABP

Country: Netherlands

Total Assets: $476 billion

Investments: Government workers

  • Canada Pension Plan

Country: Canada

Total Assets: $386 billion

Investments: N/A

  • Calpers

Country: United States

Total Assets: $370 billion

Investments: State workers

Note – One should always remember that pension funds could be advantageous for a person’s advantage. However, we also discussed some of the potential disadvantages of pension funds.

If a person wants to secure their retirement, the best way is to start investing as early as possible. If you are young and have a significant amount of wealth, you can opt for aggressive investing and become a conservative investor after a decade or two.

However, if you do not have such a hefty fortune, then you should be conservative about your investments and invest the money in fixed-income assets like bonds.

Nevertheless, by working with a financial planner or wealth manager like us, you can improve your financial situation and start saving money towards your retirement.

If you don’t want to work with a financial advisor in the long term and want to take things into your own hands, you can benefit from the services offered at adam fayed academy.

Sector Funds:

A sector fund can either be a mutual fund or an ETF that invests in companies or any other entities related to a specific industry or a sector. By doing so, they can replicate the performance of that sector. 

A sector is a part of the market which concentrates on a particular business such as technology, health care, energy, etc.

Emerging Market Funds:

Emerging market funds are those which invest in the developing markets and are considered a risky investment. There is even a possibility for negative returns as well when you opt for these funds.

Investors can earn higher profits with these, yet the market fluctuations are similar to some of the riskiest funds. 

International Funds and Global Funds:

International Funds, which are also called Foreign Funds, invest in the companies of foreign countries. These funds can be advantageous even when the domestic stock market is experiencing a fall.

Global Funds, which might sound the same as foreign funds, invest in worldwide assets that include those invested in your country of residence as well. Global funds are quite risky, yet they have provided huge long-term returns for most investors.

Real Estate Funds:

Real Estate Funds are mutual funds that invest in the securities of companies that specifically belong to the real estate sector. Even REITs (Real Estate Investment Trusts) are considered a good example for Real Estate Funds.

Commodity Funds:

Commodity Funds invest primarily in sectors related to commodities such as gold, oil, etc., which are almost everyday news. 

Investing directly in commodities might put some difficulties ahead for an investor, yet a person can get some action by investing in commodity mutual funds. There are different types of investments when we talk about commodity funds.

Commodity Fund – A fund that has direct investment holdings related to commodities is known as commodity funds. For instance, gold funds that invest in gold bullions are considered a good example of commodity funds.

Commodity Funds holding Futures – Investing in funds related to commodity-linked derivative instruments happens to be a widely followed investment practice in many commodities markets.

If you are an investor desiring to make money from commodities but you don’t want to purchase the actual commodity such as gold or oil, then you can benefit from the price changes with the help of these contracts.

Futures – While opting for futures contracts, a buyer would be obliged to buy a specific asset on a given date in the future or the seller would have to sell the asset on a date, except if the position of the holder is sold prior to that date.

Natural Resource Funds – These are the funds that invest in the entities having businesses related to commodities such as energy production, mining, agricultural businesses, oil drilling, etc.

These don’t own the actual assets or hold the futures contracts, instead, these funds offer exposure to the commodities markets by market proxy (overall market’s performance).

Combination Funds – These happen to be the hybrid funds of commodities, where the investment is made into a combination of actual commodities as well as commodities futures. 

Market Neutral Funds:

These are the hedge funds that obtain a profit, irrespective of the market fluctuations, with the help of long or short positions and other similar derivatives. 

These funds help in obliterating the risk by investing in such a way that they can cope with any sort of market environment. 

Inverse/Leveraged Funds:

These are nothing but the index funds, which operate in the opposite direction of the benchmark index. 

In simple terminology, an Inverse Index Fund or an Inverse ETF is created with the help of derivatives in such a way that the profit of the benchmark index would result in the loss of this fund and vice versa. 

Inverse ETFs let an investor acquire profits when the market of the underlying index experiences a decline, while the investor won’t be required to sell anything short.

Asset Allocation Funds:

These are the flexible funds that combine assets such as debt instruments, equities, commodities, etc., in a balanced ratio. 

Depending on the pre-determined strategy of the fund manager, or the fund manager’s speculations on the current market trends, these funds may regulate the distribution of assets. 

Even though asset allocation funds are quite similar to that of hybrid funds, these require the fund manager to have an advanced level of knowledge and expertise while allocating the assets.

Gift Funds:

These are nothing but the mutual funds that are gifted by a specific person to their friends or family members or anyone else. Mostly gifted to a family member for securing their future.

Types of Investment approach (Funds):

Fund managers usually opt for various types of strategies or make use of different styles of investing so that they achieve the financial goals of an individual. 

By selecting funds with varied investment styles, you can diversify your investment beyond its type. This practice is considered an efficient way of mitigating risk. 

There are 4 common types of approaches for investing, which are as follows.

  1. Top-down approach:

This type of investment approach concentrates on the overall situation of the economy. After that, it selects the regions or industries that are expected to perform well. The main objective is to invest in specified entities belonging to a particular sector or a country.

  1. Bottom-up approach:

This type of investment approach only concentrates on the specified companies that are performing well, regardless of any other factors.

  1. Combination of both:

A fund manager can opt for choosing the countries he/she wants based on the top-down analysis and create a portfolio of equities within the country according to a bottom-up analysis.

  1. Technical Analysis:

This approach is nothing but trying to speculate the direction of the asset prices based on the past market data available. 

How to invest in funds:

After choosing the fund that fulfills all your investment goals, you can now get ready to buy a fund. The process of buying funds varies when compared to the process of buying stocks. 

The people who want to buy funds can do so with the help of their respective currency, whereas stocks are bought in the number of shares.

For example, when you buy a share, you own a specific number of shares, and when you buy a fund, you buy ‘X’ dollars’ worth of funds (x is just a placeholder). 

You can buy mutual funds via a fund company, bank, or brokerage firm. Before you can directly place an order, you must be having an existing account with any of these institutions. 

You might also be required to pay additional fees if you are acquiring services from an investment planner. Adding to that, every type of fund has internal costs such as fees for the fund manager, fees for the fund company, etc.

These fees can be a lot and therefore, it is wise to have a good amount of research regarding the costs and fees involved, before you can invest in funds. 

Fund Platforms – These are the investment platforms that allow an individual to buy investments online at a discounted rate, especially investments related to funds. 

The process of investing in funds is also way simple with the help of fund platforms when compared to other alternatives. 

Mostly, the assets purchased with the help of fund platforms could be held within the same platform in the form of a tax-efficient wrapper. 

With the help of these tax-efficient wrappers, investors can hold assets such as stocks, bonds, and a wide variety of funds that are handled by different fund managers.

Even though the notion of these fund platforms is to allow an individual to deal with their investments by themselves, most investors opt for a financial manager to acquire financial advice regarding their investments.

If you are having trouble finding an investment planner or a financial manager, you can acquire the best-in-class financial solutions offered by us.

Types of Fund Platforms:

However, fund platforms are further classified into two specific groups called ‘Fund Wraps’ and ‘Fund Supermarkets’.

  • Fund Wraps

A fund wrap, which is also known as a ‘mutual fund wrap’ or a ‘mutual fund advisory program’, is a kind of wealth management service that offers financial advice as well as access to a wide range of mutual funds. 

A mutual fund wrap is usually made available by a full-service brokerage. With the help of fund wraps, investors can hold a tailored portfolio of mutual funds according to their risk tolerance, financial goals, and other preferences.

Usually, fund wraps require an amount of at least $25,000 to be invested as a minimum investment requirement. Due to this, only the investors having a significant amount of wealth can benefit from fund wraps.

An excellent alternative to these would be Robo advice platforms, which come with an option of low budget and fully automated version of investment outlining as well as portfolio creation services. All these for lower fees.

  • Fund Supermarkets

Fund Supermarkets ate the investment platforms or brokerage firms that make a wide range of funds available for investors, which belong to various fund families. 

Most investors opt for fund supermarkets because they obtain an opportunity of shopping for a variety of funds that belong to different types of asset classes along with varied holding such as national and international.

People having a lot of wealth and work with full-service brokers or investment planners usually go for the fund supermarkets.

Along with them, people who opt for discount brokers like Vanguard or E-Trade also acquire access to fund supermarkets, with the availability of various options.

Bottom Line:

Mutual Funds, ETFs, Hedge Funds, and any other type of investment would require a level of expertise and knowledge for earning money. 

For varied reasons, some of you may not have the time or the necessary amount of knowledge for acquiring profits from your investments. Therefore, we highly suggest you work along with a financial planner or investment advisor.

If you are thinking about searching for an efficient financial advisor/wealth manager, then we got you covered. You could acquire the best financial solutions with the help of the services offered by us.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 277.4 million answers views on Quora.com and a widely sold book on Amazon

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