When you invest in a pooled investment, your money goes into an investment fund. You pool your money with others to help spread the risk. Professional fund managers then invest the money on your behalf in a highly competitive environment.
An investment company invests a pool of funds belonging to many individuals in a single portfolio of securities. In exchange for this commitment of capital, the investment company issues to each investor new shares representing his or her proportional ownership of the mutually held securities portfolio (commonly known as a mutual fund).
Mutual funds are classified according to whether or not they stand ready to redeem investor shares.
Various fees charged by mutual funds:
There are four types of mutual funds based on portfolio makeup.
There are two investment styles.
Other Investment Products
1. Exchange Traded Funds
Refer to Reading 61 (Introduction to Alternative Investments).
2. Separately Managed Accounts
The key difference between mutual funds and separate accounts is that, in a separate account, the money manager is purchasing the securities in the portfolio on behalf on the investor, not on behalf of the fund. Therefore, the investor can determine which assets are bought or sold, and when.
A mutual fund investor owns shares of a company (mutual fund) that in turn owns other investments, whereas an SMA investor owns the invested assets directly in his own name.
An investor in an SMA typically has the ability to direct the investment manager to sell individual securities with the objective of raising capital gains or obtaining losses for tax planning purposes. This practice is known as "tax harvesting"; its objective is to attempt to equalize capital gains and losses across all of the investor's accounts for a given year in order to reduce capital gains taxes owed.
Another major advantage of individual cost basis is the ability to customize the portfolio by choosing to avoid investing in certain stocks or certain economic sectors (technology, sin stocks, etc.).
3. Hedge Funds
A hedge fund is an investment fund, open to a limited range of investors, that undertakes a wider range of investment and trading activities than traditional long-only investment funds, and that, in general, pays a performance fee to its investment manager. Every hedge fund has its own investment strategy that determines the type of investments and the methods of investment it undertakes.
Unlike mutual funds, most hedge funds are not regulated. The net effect is that the hedge fund investor base is generally very different from that of the typical mutual fund.
Hedge funds employ many different trading strategies, which are classified in many different ways, with no standard system used. A hedge fund will typically commit itself to a particular strategy, particular investment types, and leverage limits via statements in its offering documentation, thereby giving investors some indication of the nature of the particular fund.
4. Buyout and Venture Capital Funds
Both funds take equity positions and plan a very active role in the management of the company. The equity they hold is private, and they don't have a long investment horizon.
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