Investment funds are a type of investment vehicle that focuses on risk diversification and professional management of your invested capital.
In this post, we'll explain what an investment fund is, how it differs from mutual funds, and we'll also look at different reasons why you might consider investing in an investment fund.
An investment fund is a fund that you can invest your money in. The fund then takes your money and invests it in a variety of assets - everything from stocks and bonds to commodities and real estate. It depends on the individual fund and its investment strategy.
The idea here is that you get someone else to manage your invested funds, so you don't have to select a range of investment assets yourself. This can make it easier for some people to get started with investing because they get professional help.
Another important feature of the investment fund is that you get access to many different assets through a single investment. Depending on the given investment fund, there will be selected assets that create a balance in your risk spread - this is also known as diversification.
In other words, your money is spread out on different horses. If one horse loses, it can be compensated by another horse winning.
This way you are better protected against market fluctuations. For example, if you invest a lot of money in a single company, your investment will be 100% dependent on the performance of that company.
If performance is poor, your entire investment will be affected. That's why some investors may be interested in spreading their risk across multiple assets - betting on multiple horses - to best protect their investment against isolated fluctuations in company performance.
And you can do this by investing in many different companies. However, you should keep in mind to choose companies that do not follow each other too closely in general market development, because then you will have the same problem in terms of risks.
Selecting specific companies to balance risk and return can be a time-consuming and challenging process. And that's exactly the challenge that investment funds seek to solve.
When you invest in an investment fund, the idea is that the process of selecting good and relevant assets is done for you. In return, you pay a small fee to the fund to manage your money. This is the trade-off you need to consider when you are about to invest in an investment fund.
You should also consider that if you need to spread your risk across different assets yourself, you may also have to pay fees for each of these transactions. When you invest in a fund, you only have to pay the fee for that single transaction, as well as the ongoing management costs.
This is important to keep in mind when calculating the pros and cons of your next investment.
In addition, we can also mention that there are many different types of investment funds, each with their own goals in mind. Some focus on Danish stocks, others on European stocks and others on international stocks.
If you've read up on investment options - including investment funds - you may have also come across the term 'mutual fund'.
In that case, you will most likely ask yourself: "What is the difference between an investment fund and a mutual fund?".
And we understand why. The two are very similar, but they're actually two different sizes.
An investment fund is typically not listed on a stock exchange and is therefore traded off-exchange .
A mutual fund is typically listed and therefore traded on the stock exchange.
The above is the main difference between funds and associations. And while funds are not traded on the stock exchange, it is still possible to access them through the most popular investment platforms such as Nordnet and SaxoInvestor.
Although the two differ in terms of whether they are listed or not, they follow many of the same principles. Namely, risk diversification, professional management, fee savings and freedom of choice in terms of investment area.
The typical reasons for wanting to invest in an investment fund include, among others:
Investment funds allow investors to spread their investments across a wide range of assets such as stocks, bonds, commodities and real estate. This helps to reduce risk as poor performance in a particular sector or stock can be offset by good performance elsewhere in the portfolio.
Investment funds are managed by experienced investment managers who have the knowledge and expertise to make decisions about where to invest funds. This frees investors from the need to closely follow the markets and make decisions on individual stocks or bonds.
Investment funds come in different shapes and sizes, including stock funds, bond funds, sector funds, sustainable funds and more. This allows investors to choose funds that suit their specific investment goals and risk tolerance.
Investment funds allow investors to invest in a broad portfolio of assets, even if they don't have large amounts to invest. This makes it easier to benefit from diversification and professional management, even with less investment capital.
As we discussed earlier in the post, it's also possible to create your own personal portfolio of investment assets that match your risk appetite and investment strategy.
For example, you can choose to invest in shares, bonds or something completely different - crowdlending, for example.
The beauty of crowdlending is that it's a form of investment that works like a loan. When a developer or project manager needs to develop a large building project, it requires start-up capital. This money can be borrowed from the bank, but it can also be borrowed through other means - for example, through a crowdlending-based loan.
Let's say you invest DKK 10,000 in a construction project. The developer uses this money to develop the project, which will later generate a return in the form of renting out the building.
The DKK 10,000 you have lent out, you get back - plus interest. Just like when you take out a loan from a bank, a crowdfunding-based loan is also subject to interest.
This is how you can get a positive return on your investment. The interest rate is agreed in advance, so you can be sure of the interest return your investment will generate.
There are still risks associated with investing in crowdlending, just like any other investment method. Read more about crowdlending risk here.
Crowdlending can be seen as a complement to your investment portfolio, allowing you to diversify and spread risk.
Read also: Investment tips - your guide to investing
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