What is an investment fund?

An investment fund is a pooled collection of capital from multiple investors used to buy a diversified portfolio of securities. Each investor owns shares of the fund rather than the underlying assets. Funds offer broader diversification, professional management, and cost efficiencies that individual investors often cannot achieve alone.

How investment funds work

• Investors buy shares in a fund and benefit from diversification across many securities.
• A fund manager selects and trades the fund’s holdings according to the fund’s stated objectives.
• Investors choose a fund based on its goals, risk profile, fees, and past performance; they do not make individual security decisions.

Major types of funds

Open-end mutual funds

• Issue new shares when investors buy in and redeem shares when investors sell.
• Shares are priced once per trading day based on the fund’s net asset value (NAV).
• Common for retail investors seeking broad diversification.

Closed-end funds

• Issue a fixed number of shares that trade on an exchange like stocks.
• Although an NAV is calculated, market prices fluctuate with supply and demand and can trade at a premium or discount to NAV.

Exchange-traded funds (ETFs)

• Trade on exchanges intraday, like stocks.
• Often track an index but can also be actively managed.
• Typically offer lower expense ratios than comparable mutual funds.
• The first U.S. ETF debuted in 1993; by the end of 2024, ETFs held roughly $10 trillion in assets.

Money market funds

• Invest in short-term, high-quality debt instruments.
• Typically used for capital preservation and liquidity.

Hedge funds

• Actively managed and typically available only to accredited or institutional investors.
• Subject to lighter regulation than mutual funds and can use complex strategies (shorting, leverage, derivatives, alternative assets).
• Aim for absolute returns but often carry higher risk and fees.

Fees and expenses

Common fund fees include:
* Management (expense ratios) — ongoing costs to run the fund.
* Transaction costs — trading-related expenses inside the fund.
* Sales charges or redemption fees — one-time costs for buying or selling fund shares.
Lower fees generally improve long-term investor returns, all else equal.

Choosing the right fund

Consider the following when evaluating funds:
* Investment objective and strategy — does it match your goals?
* Risk tolerance — volatility and potential for loss.
* Track record and manager experience — consistency over a full market cycle.
* Fees and tax efficiency — aim to minimize costs and unnecessary tax drag.
* Liquidity and trading characteristics — especially important for ETFs and closed-end funds.

History and context

Investment funds in recognizable forms have existed for decades. The Massachusetts Investors Trust (launched in 1924) is widely cited as the first open-end mutual fund. ETFs emerged in the early 1990s as a flexible, intraday-traded alternative to mutual funds.

Bottom line

Investment funds provide an efficient way to build a diversified portfolio with professional management. Understanding the differences among mutual funds, ETFs, closed-end funds, and hedge funds — along with fees, risks, and a fund’s strategy — helps you choose the products that best fit your objectives.