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A fund is cash saved or collected for a specified purpose, often professionally managed with the goal of growing the value of the fund over time. In investing, the most common example is a mutual fund, which pools money from shareholders to invest in a portfolio of assets such as stocks and bonds.
More generally, a fund is cash set aside by individuals, companies, institutions and governments for future use. Some common fund examples include:
Emergency funds, a “rainy day fund” that people tap into during adverse financial situations.
College funds, which are used to save for higher education, often through what is known as a 529 plan.
Trust funds, which are a reserve of cash saved and invested for a beneficiary, who will have access to some or all the funds after a period of time.
Foundations and endowments, which collect cash from donors to help a designated charity, cause or nonprofit organization.
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How do funds work?
Investment funds take the contributions of fund investors and purchase a portfolio that may include stocks, bonds, short-term debt or a combination of assets. Investors don’t actually own the underlying assets, but rather buy shares of the fund (which is why fund investors are known as shareholders). As the total value of the stocks or bonds within a fund rises and falls, so does the value of the fund shares.
According to the U.S. Securities and Exchange Commission, investors often choose mutual funds because they offer:
Professional management. The average investor doesn’t have the expertise to put together and manage an investment portfolio. Instead, fund managers do that heavy lifting for shareholders.
Affordability. Most mutual funds require a low minimum investment.
Liquidity. Fund investors can typically sell their shares at any time.
Instant diversification. Any investment in a single company’s stock is inherently risky. Funds reduce that risk as they often invest in a wide variety of companies, frequently in different industries. This diversification decreases the risk of losing your principal investment.
» Learn more: Understand how mutual funds work for you
Types of funds
Here are some common types of investment funds:
Mutual funds, as noted above, take cash from a large group of investors and invest in stocks, bonds and other securities. Shares of mutual funds are bought and sold at the end of each trading day.
Money-market funds are fixed-income mutual funds that invest in low-risk, short-term debt and can be easily turned into cash. Money market funds typically offer low returns, but current yields are higher (around 2%) thanks to this year's interest rate hikes.
Index funds are a type of mutual fund whose investments track a particular market index, such as the S&P 500. Index funds are a passive way to invest in the stock market.
Exchange-traded funds, or ETFs, are funds similar to mutual and index funds, except they can be traded like stocks throughout the day over a stock market exchange.
Real estate investment trusts, also known as REITs, are companies that invest in real estate, income-producing properties like apartment buildings, hotels or malls. They are often compared to mutual funds because they typically hold a selection of real estate investments.
Hedge funds pool funds from pre-qualified investors, typically high-net-worth individuals and organizations. Hedge funds typically employ riskier trading strategies and charge high performance-based fees.