What are investment funds?Have you read a recent news story about the drop in returns on stock funds this year compared to last year, so that earnings on bond funds overtook those of stock funds? Did you read that value funds and dividend funds are the most stable funds when stock markets are volatile, or unpredictable?
You may know what “stock funds” and “bond funds” are but you may not be familiar with the terms “value funds” and “dividend funds.” Let’s find out what different types of funds there are on the market. But first, let’s discuss what we mean when we speak of “funds.”
A fund refers to a pool of money or capital managed by an investment company. The company raises money from investors and puts it into a group of assets ― known as investment targets ― in keeping with a set of objectives they have stated. If you want to put money in various investment targets ― in other words, if you want to invest in different companies, industries and markets, such as real estate, bonds or stocks ― but don’t have a lot of money or any expert knowledge, investment funds can be a good way to make a decent profit.
A fund company raises money from potential investors like you, creating a large capital (or money) pool, and a fund manager in the company places the money in various investment targets judged to be likely to generate profits.
Types of funds:
The easiest way to identify funds is by “where” the money is invested. One type is the so-called “stock fund” or “bond fund,” where money is invested in corporate stocks or bonds. This is the most common type of fund ― it’s available everywhere. Another type is “commodity funds,” which are invested in material or physical goods such as real estate, airplanes, gold, oil or copper.
There are also different kinds of stock funds, such as mixed stock funds, mixed bond funds and bond plans. Stock funds use most of their capital ― more than 60 percent ― to buy corporate bonds or treasuries (bills, notes and bonds issued by governments). Similarly, bond funds allocate more than 60 percent of their capital pool to buy various kinds of bonds.
Mixed stock funds are similar to normal stock funds since they allocate a big portion of their capital pool for buying stocks. Mixed stock funds, however, invest a smaller percentage of their capital pool to buy stocks than official stock funds.
But don’t assume you now know everything about funds. If you visit a local bank to open a stock fund account, you might still get confused by such terms as “growth-oriented funds” or “stability-oriented funds.”
Let me explain this simply: Stock prices, by their nature, can change anytime, rising and falling, sometimes drastically, because of changes in the market.
For that reason, even if you use a big chunk of your money to buy many stocks, the worst possibility is that you could lose a lot of your investment. On the other hand, you could emerge with huge profits if you’re lucky. Such high-risk, high-yield funds are called “growth-oriented funds.” In contrast, a fund that allocates a relatively smaller portion of its total money to buy stocks is a “stability-oriented fund.”
Investing in a growth-oriented fund may not be a bad idea if you are investing your own excess money, but retirees with no regular income may be better off choosing stability-oriented funds. This is why you have to look at your current financial situation and investment habits before choosing a fund.
You might ask: If fund product A and fund product B both invest the same amount of assets in stocks, will both funds see the same returns?
The answer is absolutely not. The profits to be gained from each fund differ greatly, depending on which stocks the fund managers selected.
Such terms as “value funds” or “dividend funds” are easier to understand; the terms tell you exactly the kinds of stocks fund managers tend to choose when investing in stocks.
For instance, a fund that buys stocks of big major companies, like Samsung Electronics, is called a “blue chip fund.” If a fund picks up shares of smaller companies, it is called a “small cap fund.” A “dividend fund” invests in shares that offer generous dividend payments. You might also hear about a “pre-IPO fund,” which buys shares of newly listed companies. Or you might see a “growth stock fund,” which usually buys shares in companies with great potential for growth. A “value stock fund” primarily holds stocks deemed to be currently undervalued in price. That means it can be a promising bet.
What is a so-called “index fund?” The word “index” is your guide. The fund generates profits in proportion to the growth of stock price indices (indicators). If the stock index rises by 25 percent, an index fund also targets a yield of 25 percent. Different fund products generate different rates of profits according to how their assets are managed, but index fund yields are not much different from each other, as long as the funds benchmark the same stock index.
Putting your money in a fund is an “indirect investment,” in which you entrust your money to fund managers who are authorized to handle the assets on your behalf. But some individual investors want their own preferences reflected on the money management of their assets. A so-called “umbrella fund” is a fund product for such people, who do not want to leave the investment decisions for their money entirely to fund managers.
You all know what the word “umbrella” means. An umbrella fund gathers lots of small funds together as one. When you buy into a typical umbrella fund, you buy roughly a half-dozen “subfunds,” each focusing on a different world market. Assets may be switched from one subfund to another, either for a minimal fee or for free.
Investors can therefore gain access to a balanced and flexible global stock and bond portfolio by way of a single fund. For instance, when stock markets are performing well, you can move most of your assets to growth-oriented funds, and move them again to stability-oriented funds when the stock markets face downturns.
Some of you may wonder: why do we have to sign up for an umbrella fund, when we can simply put our money in one fund and move it to another fund?
The reason is the service fee. When you move your assets from one subfund under an umbrella fund to another subfund, you are usually not charged a service fee. However, you are slapped a service fee worth 70 percent of your total profits when moving your money from one independent fund to another.
Now you know what kinds of funds are on the market.
Since funds do not offer any fixed interest rates like bank deposits, choosing what fund to sign up for requires that you do more research ― meaning that you at least have to know about the different types of funds and how they work.
by Ahn Hae-ri
with the Korea JoongAng Daily
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