An investment fund is a financial vehicle for collecting cash from numerous separate investors for investing in a portfolio of securities based on a certain investment objective. Investment funds with different investment objectives are established and provided by different types of investment companies that issue different types of securities.
Investment funds generally provide asset diversification among a number of different financial assets. This spreads the investment risk and reduces their systematic risk. Investment funds also benefit from the economies of scale that can be achieved through the collective pooling of money, investing larger amounts, and the sharing of operating costs.
| Fund Asset Diversification (Example) | |
| Asset Class | |
| Domestic Stock | 45.87% |
| International Stock | 11.57% |
| Municipal Bond | 4.00% |
| Taxable Bond | 18.74% |
A diversified investment fund invests in different asset classes, such as stocks, bonds, money market instruments, commodities and derivatives. Its investment in a given asset class depends on the fund's investment objective. In general, the greater the diversification of a fund's investment portfolio, the lower its risk and volatility.
For a US investment fund to be diversified in accordance with the US Investment Company Act, it must hold a minimum of 75% of its assets in cash, government securities and other eligible securities subject to a limitation of no more than 5% of its assets or 10% of the voting securities of the issuing company.
Any US investment fund that is not diversified in accordance with the Act is a non-diversified fund. A non-diversified fund can invest a larger percentage of its assets in the securities of a smaller number of issuers than a diversified fund. They usually invest in a few securities of companies belonging to a certain sector.
An investment company issues fund shares that represent a proportionate ownership interest in the net assets of its portfolio. The fund shares give investors the right to dividends from the income and capital gains that the portfolio generates.
All but closed-end investment funds issue redeemable securities. Redeemable shares entitle investors to a proportionate interest in the issuer’s current net assets upon presentation to the issuer or person designated by the issuer.