We have already seen in our article about diversification that a prudent investor does not put “all his eggs into one basket”, but allocates investments to several different assets in order to spread the risks associated with these investments. We have also seen that diversifying investments can be a costly exercise.
The use of an investment fund can be an interesting solution which in addition also provides a range of other benefits.
To illustrate this, let’s consider an investment fund that invests in equities. We have already seen that such a fund invests the money entrusted to it by investors in shares of many different companies. If you put your money in an equity fund, you invest from the start in a wide range of companies, and this even with modest investment amounts. You thus realize a good risk diversification at relatively low costs.
An investment fund offers a high level of investor protection. An investment fund is a regulated investment vehicle, and regulation clearly defines what the fund is allowed to do and what not. Each fund must first be approved and will then be continuously monitored by the competent supervisory authority.
The Fund’s assets must be strictly separated from those of its management company, and the safekeeping of the assets held by the investment fund must be entrusted to a depositary (which must be a regulated credit institution). This guarantees that the fund’s assets are not affected in case of financial problems or bankruptcy of the fund company.
An investment fund generally offers a high degree of flexibility in terms of investments. You can invest a single sum of money or smaller amounts at more or less regular intervals, as it suits you best.
The type of fund determines its level of liquidity
An investment fund is a very liquid investment: You can sell your units or shares or return them to the fund company at the current redemption price at any time. This is particularly the case for UCITS which are required by law to be open-end funds, i.e. to allow investors to withdraw their money whenever they want.
However, this is not the case with closed-ended funds. These funds generally have a finite, but relatively long duration (10 to 20 years) and collect a likewise pre-established amount of capital in order to finance long-term, often illiquid projects (such as real estate projects). Once this amount is reached, the fund is closed and does not accept new investment money. In principle, investors may leave the fund only at the end of its life cycle.
Investing in an investment fund requires little effort. It is not necessary to constantly monitor the evolution of financial markets and the various securities in which it has invested. That is the task – and the job! – of the fund manager. You thus benefit from professional management of your assets at relatively modest costs.
Finally, an investment fund can also give you access to specific and exotic markets where an individual investor would have difficulties to invest.