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An investment fund is a fund that pools the resources of many investors and invests in combinations of stocks, bonds and other securities. The main advantage of investment funds is that they provide access to a range of sophisticated investments through a managed service.
When you invest in a collective investment fund - or more precisely, when you buy into one - you are indirectly investing in the assets owned by the fund. The value of these underlying assets ultimately determines the value of your investment. The fund itself is run by a fund manager who makes all the investment decisions on your behalf.
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Investment fund objectives
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The fund's overall investment objective is outlined in the fund's key features document. According to this, the fund manager selects a range of underlying securities (stocks and bonds). Objectives vary from fund to fund. Some funds want to achieve growth, while others aim to provide an income for the investors.
The securities held by the fund also depend on the fund type. The manager combines the fund's securities holdings into a portfolio. The portfolio gains or loses value in proportion to the combined performance of these holdings. All investors in the fund own a part of this portfolio of securities and, when the fund makes a profit, get paid a dividend or interest in proportion to their ownership.
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Investment Fund Structures
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Investment funds are divided into two broad categories - open-end funds and closed-end funds.
Open-end funds are offered through trusts and by companies. Open-end refers to the fact that the number of shares or units issued by the fund can increase and decrease as investors add and withdraw their investments.
Closed-end funds tend to be companies that invest in other companies. They are 'closed' because they have a set number of shares that does not change regardless of the number of investors. The holdings in a closed-end fund are never redeemed. Instead, the shares must be bought and sold on a stock exchange. Consequently, the share prices are affected not only by the value of the investments that the company holds, but also by the forces of supply and demand.
There are three main structures used to provide investment funds: Unit Trusts and Open Ended Investment Companies (OEICs), which are open-end funds, and investment funds, which are closed-end funds.
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