What Are Investment Funds?
July 24, 2025
If you're looking for a way to diversify your investment portfolio without having to pick and manage dozens—or even hundreds—of individual securities, investment funds might be your solution. These pooled investments provide a simple way to gain wide market exposure. They are managed by financial professionals or designed to track a specific market index. In this guide, we'll explain how investment funds work, their types, advantages and disadvantages.
What Are Investment Funds?
An investment fund is a collection of various assets—like stocks, bonds, or other securities—that you can invest in through a single transaction. Instead of buying each asset individually, your money is combined with funds from other investors and then invested based on the fund’s overall strategy. This approach gives you a slice of many investments in one package, helping spread out risk and simplify the process.
Some investment funds hold hundreds or thousands of securities, something most individual investors couldn’t easily replicate on their own. Whether it’s a stock index fund holding companies across an entire market or a bond fund packed with different debt instruments, investment funds provide an accessible entry point to diversified investing.
How Do Investment Funds Work?
When you buy into a fund, you're essentially purchasing shares of the fund itself—not the individual assets inside it. The fund manager or managing team decides how to allocate the pooled money, choosing which assets to buy, sell, or hold depending on the fund’s goals.
The value of your shares rises and falls based on how the fund’s underlying investments perform. You’ll often pay an annual fee—known as the expense ratio—for the management and administrative services that keep the fund running. This fee is expressed as a percentage of your invested amount and can vary widely depending on whether the fund is actively or passively managed.
Active vs. Passive Management
Investment funds fall into two broad categories when it comes to how they’re managed:
● Actively managed funds rely on a team of professionals to make ongoing investment decisions. Their goal is to beat a benchmark index, and they may adjust the fund’s holdings frequently in response to market trends. These funds generally charge higher fees due to the resources required for active management.
● Passively managed funds, such as most index funds, aim to match—not beat—a specific market index. They track a benchmark by mirroring its holdings and proportions. Because there’s less trading involved, these funds usually come with lower fees.
Open-End vs. Closed-End Funds
Investment funds can also be classified based on how shares are issued:
● Open-end funds—which include most mutual funds and ETFs—issue new shares as investors join and redeem them as they leave. Prices are based on the fund’s net asset value (NAV), calculated daily.
● Closed-end funds have a fixed number of shares that trade on the stock exchange like regular stocks. Their prices fluctuate based on supply and demand, which means they can trade above or below their NAV. These funds often invest in less liquid assets and may carry more risk.
Types of Investment Funds
Here’s a quick overview of the major categories:
● Mutual Funds: Pooled investments that are priced once daily. They can follow a variety of strategies—from conservative bond holdings to aggressive growth stocks.
● ETFs (Exchange-Traded Funds): Similar to mutual funds in structure, but trade throughout the day like stocks. ETFs are often more tax-efficient and cost-effective.
● Index Funds: Usually passive and designed to follow a specific index such as the S&P 500. They can be structured as mutual funds or ETFs.
● Target-Date Funds: Designed for retirement savers, these funds automatically shift from riskier to more conservative investments as a target year approaches.
● Money Market Funds: These low-risk funds invest in short-term, high-quality debt like Treasury bills. Returns are modest, but they offer liquidity and stability, making them useful for emergency funds or short-term goals.
Pros and Cons of Investment Funds
Pros:
1. Diversification – One fund can expose you to hundreds of investments, helping spread risk.
2. Professional Oversight – Especially in actively managed funds, professionals make investment decisions on your behalf.
3. Simplicity and Access – Funds allow small-dollar investors to access broad markets and complex strategies easily.
Cons:
1. Fees and Expenses – Especially in actively managed funds, costs can cut into your returns over time.
2. Market Risk – Like any investment, funds can lose value.
3. Limited Control – You don’t get to hand-pick the fund’s individual holdings.
Choosing the Right Fund
Picking an investment fund involves more than chasing returns. Here’s a step-by-step approach:
1. Know Your Risk Tolerance – Assess how much volatility you’re comfortable with.
2. Diversify Across Asset Classes – Look for a mix of funds that spread your money across stocks, bonds, and other assets.
3. Decide on Active vs. Passive – Active funds offer potential for higher returns (at a cost); passive funds tend to be cheaper and more predictable.
4. Compare Fund Ratings and Fees – Look for reputable third-party ratings and understand the expense ratios before investing.
5. Align With Your Time Horizon – Choose funds that match your goals, whether short-term savings or long-term growth.
How to Get Started
1. Set Your Goals – Are you investing for retirement, a down payment, or education? Your goal will shape your fund choices.
2. Open a Brokerage Account – Choose a provider that offers a wide selection of funds with low fees and good research tools.
3. Fund Your Account – Deposit your initial investment capital.
4. Buy Fund Shares – Start with a lump sum or invest gradually using a dollar-cost averaging strategy.
5. Monitor and Adjust – Revisit your portfolio annually and rebalance as your financial goals evolve.
Investment funds offer a powerful way to invest efficiently and with flexibility. Whether you're a beginner or an experienced investor, understanding how they work and how to pick the right one is a key step in building long-term wealth.
Sources:
https://www.fidelity.com/learning-center/smart-money/investment-funds
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.