When you’d like to invest, you’ll have many options, from stocks to bonds, real estate, commodities, ETFs, etc. This means it could not only be overwhelming but also challenging to find the right investment based on your goals and risk appetite.  

One of the most convenient and accessible investment options is an investment fund. But what is an investment fund? How do they work? Why should you choose to invest in an investment fund?

In this post, we’ll look at these questions in more detail.  

What is an Investment Fund?

Let’s start by looking at what an investment fund is. Investment funds, also known as collective investment schemes, are investment vehicles that allow investors to pool their money and then invest in stock, securities, derivatives, or other financial instruments.

Investment funds are typically managed by a professional investment manager. As a result, investment funds are more convenient, accessible, and affordable for investors than choosing and managing their investments by themselves. We'll look at the other advantages of investment funds in greater detail later.

There are several different investment funds, each with its advantages and disadvantages. Some examples include

·      Money market funds.

·      Mutual funds.

·      Foreign funds.

·      Index funds.

·      Hedge funds.

·      Global funds.

How do Investment Funds Work?

Now that we've seen investment funds let's look at how they work. And to do this, we'll look at a simple example. Let's assume Apple stock trades at $500 a share and Amazon stock trades at $800 a share, and you would like to buy 10 shares each. This would cost $13,000, which is a lot of money.  

However, if some friends, colleagues, and family pool your money, you can buy these shares at a much lower price per person. Everyone who puts money into the pool will then have a share in the investment based on how much they've invested. Although this is a simplified explanation, it illustrates the concept perfectly. 

With investment funds, however, the shares in the fund are known as units. The price of the units is calculated by dividing the fund’s total equity, or investment value, by the number of investors. New investors can buy these units, and current investors can sell theirs. Here, it's also important to distinguish between open-end and closed-end investment funds. 

Open-end funds have no set number of shares or units, and they'll add new shares as investors add more money to the pool. Likewise, once investors sell their units, these funds will retire these shares. Conversely, closed-end funds have a predetermined number of shares that investors can buy or sell. Closed-end funds are also traded on an exchange similar to regular stocks.

As mentioned earlier, investment funds are managed by investment managers. Their primary function is to manage the fund for the benefit of the investors and, as such, aim to find and invest in the best opportunities and financial products.  

The Benefits of Investing in Investment Funds

We’ve now dealt with a broad overview of investment funds and how they work. The next question is: What are the benefits of investing in investment funds? There are several benefits to investing inking these funds, ma them the ideal investment option for many investors.

Diversification 

Diversification is the perfect tool to reduce your risk when investing. This is simply because, when diversifying, you’ll invest in several assets. Thus, if one’s value falls, the potential loss is hedged by the other assets. In addition, on a risk-adjusted basis, diversified portfolios perform better than single-asset investments.

For instance, if you only invest in one stock, your return will diminish when the stock’s value decreases. Conversely, when you spread your investment across several stocks, a fall in the value of one of the stocks will have less impact on your investment if the other stocks’ value stays the same or even increases.

Because investment funds invest in a range of financial assets, they allow you to diversify your investment, reduce your risks, and possibly achieve greater returns than you would have if you’d invested in single assets.

Liquidity

Another benefit of investment funds is that they offer more liquidity. This means they’re quicker and easier to convert to cash. For instance, when you invest $1,000,000 in real estate, and you would like to access the cash in your investment, you’ll need to sell the property, which often takes a lot of time. So, this type of investment has low liquidity.

Conversely, investing in an investment fund and converting your investment to cash is as simple as selling or buying units in the fund. Once done, receiving your capital only takes a few days. This means this type of investment is highly liquid.

Liquidity is an important consideration when it comes to financial planning, as it can have a significant impact on the returns from your investment. For instance, low liquidity could mean realizing an investment at a lower value.

Access 

Investment funds are also more accessible than many other types of investments. This is due to a few reasons. For one, many people don’t have the skills or knowledge to choose, make and manage investments. Because an investment manager manages investment funds for the benefit of the investors, they eliminate this problem. As such, investment funds allow investors to invest in a range of assets without needing to do due diligence or manage their investments themselves.

Another way in which investment funds are more accessible is by bringing down the barrier of entry. For instance, when you consider the pricing of some of the most popular stocks around the world, you’ll notice that they can carry hefty price tags. However, because investment funds allow investors to pool their money, they can invest in some of the best investment assets at a fraction of the cost.   

In addition, investment funds often have low investment minimums. In other words, they don’t require large upfront investments. This means that investors who invest smaller amounts more frequently don’t have to wait and save money before they can invest over time and d invest.

Convenience 

We’ve already mentioned that investment funds make investments in various assets more accessible. There is another benefit to this, though. Buying and selling individual assets, like stock, takes time and effort. Investment funds make this easier and allow investors to invest in several assets with a single investment. As such, investment funds make investing far more convenient.

Reduced Costs

Apart from taking time and effort, investing in separate assets can be quite expensive. Every time you buy or sell a particular stock, you’ll need to pay a brokerage fee. These fees typically have a set minimum and then increase as the value of the transaction increases. While these fees are generally not much, they do add up over time and might have a significant impact on your returns. 

Conversely, because you don’t buy or sell the underlying assets when investing in an investment fund, there are no such fees. Instead, investment managers usually charge an annual management fee calculated as a percentage of your equity in the fund. This is far more affordable and increases the returns you’ll make from your investments.

What is a Golden Visa Investment Fund? 

We’ve mentioned the different types of investment funds earlier. However, there is another investment fund you should be aware of – the Golden Visa investment fund. This is an investment option if you want to obtain a Golden Visa or residency in Portugal, which was introduced in 2017.

With this scheme, you’ll be able to invest in an approved investment fund in return for a residency visa. To qualify for the program, you’ll need to be a non-EU/EEA or non-Swiss citizen and have a clean criminal record. You’ll also need to invest a minimum of €500,000 and maintain your investment for five years.

Apart from the benefits mentioned above and the fact that you’ll qualify for a residency visa, this investment is regulated by the Portuguese government and could yield several tax benefits. This makes it the ideal option if you’re planning to relocate.

Find Out More 

Hopefully, this post helped illustrate what investment funds are, how they can benefit you, and how you can use investment funds to obtain a residency visa in Portugal. To learn more about this program or other Golden Visa programs worldwide, get in touch with us.

FAQs

Apart from the information provided above, we’ve also compiled a list of frequently asked questions people often have.

What is the minimum amount I can invest in an investment fund? 

Generally, investment funds have low investment minimums. However, this varies from manager to manager.

Do investment funds have fewer risks? 

Like any investment, investment funds also have some risks but generally carry less risk than many other investments.  

Can I invest in more than one fund to qualify for the Golden Visa program?

Yes, you can diversify your portfolio and invest in different funds as long as you meet the minimum investment threshold.