What is Fund

Characteristics of a Fund

Funds are derived into different forms based on their purpose and the participants involved. Generally, many funds possess the attribute of pooling collective capital and being managed according to their established objectives.

Below we will discuss some of the characteristics of funds.

Characteristic 1: Managed by Professionals

A major characteristic of fund is that it pools capital from participants and is managed by professional financial managers. The managers will then manage the funds based on the fund’s original objectives.

Characteristic 2: Purpose-Driven

Some funds have a clear purpose and conduct fundraising from investors at the beginning. For example, bond funds invest in bonds, while equity funds invest in stocks. There are also balanced funds, which have a more diversified investment strategy, seeking strategies such as balance between stocks and bonds.

Characteristic 3: Numerous Participants

Generally, depending on the fund's size and whether there are restrictions on participants (e.g., private equity funds), the number of participants in different funds varies. However, funds generally have the characteristic of having many participants, allowing small investors to engage in strategies and operations originally restricted only to large capital investors.

Benefits of Fund Investment

Given the characteristics mentioned above, we can identify several benefits of investing in funds:

1. Professionally Managed and Time-Saving

Since funds are managed by professionals, investors can simply monitor performance through the daily net value calculations or the monthly statements sent by banks, saving the time for one to research and invest by oneself.

2. Access to Investment Products Typically Inaccessible to Individuals

Some investment products require a larger unit cost, such as bonds, or have high investment thresholds, like indexes. The pooled fund allows investors to invest in themes and targets without these barriers.

Types of Funds

Category 1: Participants

Different Fundraising Targets, Different Investment Thresholds

Funds can be categorized based on whether their fundraising targets are aimed at the general public:

1. Public Funds: Mutual funds (also known as public funds) target the general public for fundraising. Since there are no special restrictions on the fundraising targets, anyone with the access can invest. Therefore, public funds usually have a lower capital thresholds. These public funds are generally subject to stricter regulations.
2. Private Funds Private funds target specific investors for fundraising. Generally, private funds have higher investment thresholds. For instance, in the US, the common minimum investment for private funds is $1 million. Hedge funds are a well-known type of private fund.

Category 2: Geographic Investment

Different Geographic Investment, Different Regional Risks

Funds can also be categorized based on their geographic investment. Generally, we can divide funds into three major types.

1. Single Market Funds: Funds whose holdings come from a single market are considered single market funds. Since the investment targets are concentrated, and the market are highly correlated, the regional risks faced by investors are generally higher. Conversely, when a single market performs better than others, the profits of single market funds can be substantial.
2. Regional Funds: In contrast to single market funds, regional funds diversify investment targets within a region, such as Asia, Europe, North America, Africa, etc. The regional risks faced by such investments are between those of single market and global funds.
3. Global Funds: Global funds invest in targets distributed across major global markets, so the regional risks faced by such funds are the lowest. If a sudden event occurs in just one market, the impact on global funds would be relatively small.

Category 3: Investment Targets

Different Investment Targets

Funds bring different corresponding risks and potential returns to investors based on different investment targets. Generally, we can divide investment targets into the following types:

1. Equity Funds Equity Funds invest in various stocks, generally offering higher returns but also facing higher risks.
2. Bond Funds Bond Funds invest in various bonds, earning fixed interest income and sometimes capital gains from fluctuating bond price.
3. Money Market Funds Money Market Funds primarily invest in money market instruments, typically with shorter investment durations. The returns from Money Market Funds can be higher than the deposit interest rate of the respective currency market, as they may also include yields from short-term bonds. In some investors' asset allocations, money market funds serve as a transitional station for capitals.
4. Index Funds Index funds, also known as passive funds, aim to replicate the returns of the tracked index and do not seek additional excess returns.
5. Specialized Funds Specialized Funds invest in specific sectors or industries. For example, REITs (Real Estate Investment Trusts) are funds that invest in the real estate industry, where rental income is a source of fixed income.

Category 4: Investment Risks

Different Investment Risks, Different Potential Returns

Funds can be categorized based on their investment objectives (expected returns) and the corresponding strategies and investment targets, reflecting different investment risks.

1. Aggressive Growth Funds: Aggressive Growth funds primarily aim to maximize capital gains and are characterized by high returns and high risks. These funds typically invest in small-cap stocks or focus heavily on a specific promising industry.
2. Growth Funds: Growth funds aim for medium to long-term returns, investing primarily in large-cap blue-chip stocks, bearing market risks but relatively lower compared to aggressive growth funds.
3. Fixed Income Funds: Fixed income funds aim for stable returns, with common targets such as government bonds and corporate bonds. Preferred stocks and other high-dividend securities might also be considered by managers. Generally, the risks faced by investing in fixed income funds are relatively low.
4. Capital Preservation Funds: The advantage of capital preservation funds is ensuring that investors' principal is not reduced due to investment losses. In practice, managers often purchase a large number of bonds or fixed-income securities and reinvest the interest in higher-risk market. Even in a poor investment environment, investors can still expect to recover their principal.
5. Value Funds: Value funds, compared to growth funds, invest in more large-cap blue-chip stocks with lower growth possibilities but larger safety margins. External factors such as market volatility and competition have less impact on the company's profits, making them suitable for investors who want to invest in stocks but avoid excessive risks.

Category 5: Issuance Location

The issuance location of a fund can also serve as a kind of classification. Below we would use Taiwan as a sample.

1. Domestic Funds If a mutual fund is issued by a Taiwanese investment trust company, it would be classified as a domestic fund.
2. Foreign Funds If the financial institution issuing the fund is located outside Taiwan and sells the fund in Taiwan through an agent, it would be classified as a foreign fund. Overall, funds operate under regulations, and the risk or investment characteristics of the funds are generally unaffected by the issuance location. The risks and returns of a fund would still highly depend on the aspects mentioned above, such as the investment strategies and risks. Foreign funds can invest in Taiwan's internal market, and domestic funds can also target overseas markets. However, if investors consider tax implications, the issuance location becomes more important.

Ultimately, evaluating the risk and characteristics of each fund is essential before making an investment decision. We hope the categories outlined above guide you in selecting the investment that best aligns with your goals.