How does an investment fund work?
Would you like to invest, but you are not experienced enough to build your portfolio? In this case, an investment fund could be the right solution for you.
An investment fund is made up of sums pooled by investors. These amounts are then invested in different products, for example stocks, bonds, treasury bills, etc., which are managed by a fund manager. “The investment fund could be compared to a shell whose content we choose, depending on the objective, the profile of the investor and their risk tolerance,” explains Annamaria Testani, vice-president of national sales at National Bank Investments.
Investment funds (or mutual funds) are well suited to small investors who can thus benefit from the leverage effect generated by the pooling of savers’ sums. They also give them access to a range of investments that would otherwise be out of their reach. There are several types.
Mutual funds: a wide variety
When you invest in an investment fund, you buy part of a fund, which constitutes a unit. Each fund has its own objective, as well as a specific strategy, composition and risk level. It is therefore important to read the prospectus of the fund you are interested in to fully understand its specific characteristics.
However, whether they are income-oriented, security-oriented or growth-oriented, they all aim to diversify your portfolio.
Investment funds come in different forms. As their name suggests, equity funds are made up of stocks. There are Canadian equity funds, bringing together common shares and preferred shares of Canadian companies. On the market, there are also funds composed of shares of well-established or growing American companies.
As for international equity funds, they are made up of shares of companies listed on stock exchanges in the main industrialized countries and certain emerging countries. In these last two cases, the exchange rate obviously influences the return.
Generally, equity funds are better suited to a profile that has a higher tolerance for risk. Their inherent diversification also has the advantage of being able to be exposed to different markets, particularly with regard to American equity funds and emerging country funds.
Fixed income funds, for their part, offer regular interest or dividend income, while ensuring the preservation of capital. They generally consist of debt securities such as bonds or debentures, or preferred shares of companies that pay regular dividends. Their return is relatively modest, but fixed income funds provide stable inflows and have low to medium risk.
Balanced funds combine the purchase of common and preferred shares of Canadian and international companies, debt securities and money market instruments. The diversification of investments ensures a certain stability of return and gives them moderate risk.
Made up of short-term debt securities issued by governments (Treasury bills, for example), or by corporations, as well as short-term bonds, money market funds generate fixed, safe, but low returns. students. They have the advantage of securing capital or sheltering liquidity while waiting to make another type of investment.
Specialized funds aim to invest in a specific sector of activity (precious metals, technologies, etc.) or in certain regions of the world through company shares. They present a fairly high level of risk linked to the market or currency fluctuations. The lack of geographic or sectoral diversification, as well as political upheavals, can also weigh down their performance.
