An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages include an ability to:
hire professional investment managers, who may offer better returns and more adequate risk management; benefit from economies of scale, i.e., lower transaction costs; increase the asset diversification to reduce some unsystematic risk. It remains unclear whether professional active investment managers can reliably enhance risk adjusted returns by an amount that exceeds fees and expenses of investment management. Terminology varies with country but investment funds are often referred to as investment pools, collective investment vehicles, collective investment schemes, managed funds, or simply funds. The regulatory term is undertaking for collective investment in transferable securities, or short collective investment undertaking (cf. Law). An investment fund may be held by the public, such as a mutual fund, exchange-traded fund, special-purpose acquisition company or closed-end fund, or it may be sold only in a private placement, such as a hedge fund or private equity fund. The term also includes specialized vehicles such as collective and common trust funds, which are unique bank-managed funds structured primarily to commingle assets from qualifying pension plans or trusts. Investment funds are promoted with a wide range of investment aims either targeting specific geographic regions (e.g., emerging markets or developed markets) or specified industry sectors (e.g., technology). Depending on the country, there is normally a bias towards the domestic market due to familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance, and other factors such as investment fees.
History
The first (recorded) professionally managed investment funds or collective investment schemes, such as mutual funds, were established in the Dutch Republic. Amsterdam-based businessman Abraham van Ketwich (also known as Adriaan van Ketwich) is often credited as the originator of the world's first mutual fund.
Law The term "collective investment scheme" is a legal concept deriving initially from a set of European Union Directives to regulate mutual fund investment and management. The Undertakings for Collective Investment in Transferable Securities Directives 85/611/EEC, as amended by 2001/107/EC and 2001/108/EC (typically known as UCITS for short) created an EU-wide structure, so that funds fulfilling its basic regulations could be marketed in any member state. The basic aim of collective investment scheme regulation is that the financial "products" that are sold to the public are sufficiently transparent, with full disclosure about the nature of the terms. In the United Kingdom, the primary statute is the Financial Services and Markets Act 2000, where Part XVII, sections 235 to 284 deal with the requirements for a collective investment scheme to operate. It states in section 235 that a "collective investment scheme" means "any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income".
Structure
Constitution and terminology Collective investment vehicles may be formed under company law, by legal trust or by statute. The nature of the vehicle and its limitations are often linked to its constitutional nature and the associated tax rules for the type of structure within a given jurisdiction. Typically there is:
A fund manager or investment manager who manages the investment decisions. A fund administrator who manages the trading, reconciliations, valuation and unit pricing. A board of directors or trustees who safeguard the assets and ensure compliance with laws, regulations and rules. The shareholders or unitholders who own (or have rights to) the assets and associated income. A "marketing" or "distribution" company to promote and sell shares/units of the fund. Please see below for general information on specific forms of vehicles in different jurisdictions.
Net asset value
The net asset value (NAV) is the value of a vehicle's assets minus the value of its liabilities. The method for calculating this varies between vehicle types and jurisdiction and can be subject to complex regulation.
Open-end fund
An open-end fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.
Closed-end fund A closed-end fund issues a limited number of shares (or units) in an initial public offering (or IPO) or through private placement. If shares are issued through an IPO, they are then traded on a stock exchange. or directly through the fund manager to create a secondary market subject to market forces. The price that investors receive for their shares may be significantly different from net asset value (NAV); it may be at a "premium" to NAV (i.e., higher than NAV) or, more commonly, at a "discount" to NAV (i.e., lower than NAV). In the United States, at the end of 2018, there were 506 closed-end mutual funds with combined assets of $0.25 trillion, accounting for 1% of the U.S. industry. ETF investment has also expanded among retail investors in Germany. A 2026 study by the Handelsblatt Research Institute reported that 58% of surveyed investors currently used ETF savings plans, while a further 15% had used one in the past.
Exchange-traded funds
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