Investment Funds

What Is an Investment Fund?

An investment fund is a supply of capital belonging to numerous investors used to
collectively purchase securities while each investor retains ownership and control of his
own shares.

An investment fund provides a broader selection of investment opportunities,

greater management expertise, and lower investment fees than investors might be able
to obtain on their own. Types of investment funds include mutual funds, exchange-
traded funds, money market funds, and hedge funds.

BREAKING DOWN Investment Fund

With investment funds, individual investors do not make decisions about how a fund's
assets should be invested. They simply choose a fund based on its goals, risk, fees and
other factors. A fund manager oversees the fund and decides which securities it should
hold, in what quantities and when the securities should be bought and sold. An
investment fund can be broad-based, such as an index fund that tracks the S&P 500, or it
can be tightly focused, such as an ETF that invests only in small technology stocks.

While investment funds in various forms have been around for many years, the
Massachusetts Investors Trust Fund is generally considered the first open-end mutual
fund in the industry. The fund, investing in a mix of large-cap stocks, launched in 1924

Emergence of ETFs
Exchange-traded funds (ETFs) emerged as an alternative to mutual funds for traders who
wanted more flexibility with their investment funds. Similar to closed-end funds, ETFs
trade on exchanges, and are priced and available for trading throughout the business day.
Many mutual funds, such as the Vanguard 500 Index Fund, have ETF counterparts. The
Vanguard S&P 500 ETF is essentially the same fund, but came to be bought and sold
intraday. ETFs frequently have the additional advantage of slightly lower expense ratios
than their mutual fund equal.

Mutual Fund
A mutual fund is an investment vehicle in which a pool of investors collectively
put forward funds to an investment manager to make investments on their
behalf. The fund is regulated by the Securities Exchange Commission, or
SEC.

When involved with a mutual fund, each investor benefits proportionally to the
amount of money they invested. Mutual funds may invest in stocks, bonds,
money market instruments, or other assets. Depending on the vehicle of
investment and redemption patterns, mutual fund investment can offer tax
benefits.

The disadvantages of mutual funds are that they do not provide ownership of
underlying holdings to investors; hence, investors do not have much say on the
composition and constituents of mutual funds. Mutual funds are also more
expensive and riskier as compared to index funds.

The disadvantages of mutual funds are that they do not provide ownership of
underlying holdings to investors; hence, investors do not have much say on the
composition and constituents of mutual funds. Mutual funds are also more
expensive and riskier as compared to index funds.

Basics of Mutual Funds

Mutual funds can be a good opportunity for small or individual investors to
benefit from a professionally managed investment portfolio.

Mutual Fund Companies in the Philippines

Philam Life
Sun Life
First Metro Investment Corporation
Cocolife
Grepalife
ATR Asset Management
Philequity Managemt Inc.

They usually invest in a large number of securities, and their performance is

tracked as the change in the market cap of the fund, which itself is determined
by the performance of the underlying investments.

Mutual funds charge a sales commission, known as load, as well as

management fees related to the fund’s administration. While all funds charge
management or administration fees, there are funds in the market that are no-
load, meaning they do not charge a sales commission.

The returns of a mutual fund are based on the performance of its constituents.
Therefore, skill and expertise is required to pick equities that provide desired
returns. Highly-trained professionals function as fund managers for mutual
funds

Constituents:
Sponsor-a person who, acting alone or in combination with another
body corporate, establishes a mutual fund. The sponsor forms a trust,
appoints the board of trustees, and has the right to appoint the asset
management company (AMC) or fund manager.

Trustees: The trustees act as a protector of unit holders’ interests.

Asset Management Company: An AMC functions under the
supervision of its own board of directors and also under the directions of
trustees
The major obligations of AMC include: ensuring investments in
accordance with the trust deed, providing information to unit holders on
matters that substantially affect their interests,
Custodian and depositories: The fund management includes buying
and selling of securities in large volumes. Therefore, keeping a track of
such transactions is a specialist function. The custodian is appointed by
trustees for safekeeping of physical securities while dematerialised
securities holdings are held in a depository through a depository participant.
The custodian and depositories work under the instructions of the AMC,
although under the overall di ..
Registrar and transfer agents: These are responsible for issuing and
redeeming units of the mutual fund as well as providing other related
services, such as preparation of transfer documents and updating investor
records. A fund can carry out these activities in-house or can outsource
them. If it is done internally, the fund may charge the scheme for the service
at a competitive market rate.

You can use fund rankings issued by research firms like Morningstar and
Standard & Poor to select funds. Buying shares of a mutual fund does not give
investors voting rights in a company; instead the fund manager votes on their
behalf.
However, since mutual funds generally incorporate hundreds of different
securities, it does give investors the benefit of diversification of their portfolios.

The value of a share of mutual fund is called the net asset value per share, or
the NAV. The price is determined by taking the net value of all the securities in
the fund and dividing by the outstanding shares.

Mutual funds can be open-ended or closed-ended. An open-ended mutual fund

issues an unlimited number of shares in the open market and redeems them at
market value from investors.

The share price of an open-end fund is based on the net asset value of its
constituents. Closed-end mutual funds function in the opposite manner i.e., they
issue a fixed number of shares and redemption is not allowed.

Instead, the only way for an investor to “redeem” a share is by selling it to

someone else.

Therefore, their price is based on the dynamics of supply and demand and they
always trade at a discount to the net asset value of their constituents.

Types of Mutual Funds

Broadly there are four types of mutual funds. They are as follows:

Equity Mutual funds: Equity mutual funds consist of collections of stocks of

companies. Investors can allocate funds to funds based on their goals. For
example, growth funds are focused on stocks of companies with significant
growth potential in the future. Income funds include stocks of companies that
pay regular dividends.
Money Market mutual funds: Money market mutual funds invest in short-
term debt issued by corporates, government, state, and municipalities. For
example, they might invest in US treasuries and debt issued by established
companies like Apple Inc. or Exxon. The aim of this type of mutual fund is to
generate income while minimizing risk.
Bond funds: Bond funds are considered conservative investments and provide
fixed income to investors in such funds. Like money market mutual funds, their
investment portfolio is restricted to government and corporate debt. They are
generally favored for retirement planning.
Balanced Funds: Balanced funds aim to strike a balance between equity and
bond investing. They are long term funds that incorporate a mix of stocks and
bonds in a given ratio. For example, they might have 60% stocks and 40%
bonds. Rebalancing these funds on a periodic basis adjusts their composition to
prevailing economic conditions. Some are rebalanced based on the investor’s
goals. For example, they might incorporate a more conservative approach close
to retirement.

ETFS
If you’re like many investors saving for retirement or another goal, you’ve
heard about portfolio diversification. “Don’t put all your eggs in one basket” is
among the most common pieces of wisdom dispensed to investors.

Two typical avenues investors might use for diversification are mutual funds
and exchange-traded funds (ETFs). When comparing ETFs and mutual funds,
it’s important to note that ETFs and mutual funds are similar in that both
represent a professionally managed or index-based “basket” of securities,
typically stocks and bonds. Yet, they’re structured differently.

Years ago, the key difference between mutual funds and ETFs seemed simple.
Most, though not all, ETFs featured a “passive” management approach, and
most, though not all, mutual funds featured an “active” management approach.
Since then, things have changed. Today, index-based mutual funds are
common, while ETFs have expanded and grown to include some very complex,
exotic, and risky products. The expense ratios respective to both instruments
may also vary; and the features and functionalities that make either instrument
a good match for an individual investor is contingent on the investor’s financial
goals, resources, and individual investing preferences.

For investors trying to decide whether mutual funds or ETFs are the right
choice, it helps to delve a bit deeper in how they compare and contrast. First,
let’s look at the landscape, which has changed dramatically over the last 25
years.

Mutual Funds Still Dominate, but ETF Adoption Has Grown Significantly
An ETF is a single security that typically tracks an index or portfolio and seeks
to target their performance. First introduced in 1993, ETFs have become more
popular with investors who are looking to minimize costs while maximizing tax
efficiency and investment visibility within their portfolios.

As of fall 2021, Bloomberg reported that there were some 2,500 ETFs
compared with around 6,300 mutual funds but noted that from 2020 to August
2021, ETFs took in $1.1 trillion compared with just $24 billion for mutual
funds. That said, as of early 2022, there were still a total of $27 trillion in
mutual fund assets versus $7.2 trillion in ETFs, according to the Investment
Company Institute (ICI).

So, what might these features (or lack thereof) mean for you as an investor? In
other words, what could they help you accomplish, and what demands or
limitations might they place on you as an individual investor?

To answer these questions, here’s a brief summary of some pros and cons of
ETFs versus mutual funds.

Potential Pros of Owning ETFs

With ETFs, you can trade more flexibly because these products are traded
intraday. Your minimum investment requirements are generally lower than
mutual funds. Daily holding disclosures make ETF investing more transparent.
And finally, unless you’re invested in mutual funds through an IRA, ETFs
might be more tax efficient because you’re generally required to pay taxes only
on closed positions that realize capital gains, whereas (non-IRA) mutual fund
holders may be subject to taxable events when fund managers realize gains in
the course of rebalancing a portfolio by turning over assets. A 2021 study by
S&P Dow Jones Indices found that in 16 of the 18 categories tracking U.S.
equities-focused funds, more than half the funds underperformed their
benchmark. In particular, 98.6% of large-cap growth funds failed to beat the
S&P 500 Growth index, making it the worst performing of any U.S. equities
category in the past 21 years. Some might conclude, then that a “passive”
investing model that invests in funds that target an index might be an
appropriate strategy. This may explain, in part, the popularity of index-based
mutual funds and their common appearance in retirement plans. ETFs have
certain tax advantages, such as not delaying capital gains distributions and
permitting investors to harvest tax losses. Consider consulting a qualified tax
advisor on these issues.

ETF Cons
Although ETFs are professionally managed, they generally do not offer the
same level of “active management” as mutual funds. As a self-directed ETF
investor, you might need to take a more active role in monitoring, reviewing,
and potentially rebalancing your portfolio. This self-directed approach might
require additional time and effort. Also, if you plan to actively trade the assets
in your account, or if you plan to make incremental additions to your ETF
holdings, remember that multiple trades can be subject to intraday volatility.
Mutual Fund Pros
With mutual funds, you have the choice of investing in passively managed and
actively managed funds. Passive funds are similar to most ETFs in that they
track a specific benchmark, such as the S&P 500 index. But only through
mutual funds can you benefit from a professional fund manager’s efforts to
actively manage your portfolio and rebalance it in response to big-picture
economic fundamentals. This in itself is a major advantage offered by mutual
funds; one that is largely absent in ETFs, and one that may be appealing to
investors who prefer a more hands-off approach to investing.

Good fund managers know the “ins and outs” of portfolio construction. They
understand the intricacies of particular sectors in relation to the wider economic
landscape, and they’re seasoned market participants who probably have
weathered several market downturns and other unfavorable economic
conditions in pursuit of overlooked and undervalued assets. Although mutual
funds might not have the “intraday” trading convenience of an ETF, as funds
are purchased or “redeemed” end-of-day either directly through the fund’s
issuing company or through a broker, mutual funds nevertheless offer the
convenience of direct automatic purchases; a feature that ETFs do not offer.

Mutual Fund Cons

Some mutual funds have high asset turnovers, which can mean more
transaction costs and a larger capital gains tax bill. Fund managers report their
holdings quarterly or semiannually; this means that you won’t always know the
details or frequency of each transaction. And finally, mutual fund holders may
also be required to pay 12b-1 fees: annual marketing and distribution fees that
are part of a fund’s operating expenses. Bear in mind that these “expense
ratios” are characteristic of both mutual funds and ETFs. And some mutual
funds may come with higher or lower expense ratios than other funds or ETFs.
So be sure to read a fund’s prospectus carefully to determine whether its
strategy and costs may be suitable for your investment goals.

Yet, Mutual Funds and ETFs Have Similarities

Both provide a means for you to invest in pooled assets.
Both offer a convenient way to pursue diversification.
Both can be traded without transaction costs at TD Ameritrade.*
In short, both products come with their own set of advantages and
disadvantages.

But which product—mutual funds or ETFs—might better serve your financial

goals, match your risk tolerance, or align with your investment style?
Ultimately, it depends on the type of investor you are.

How actively do you plan to invest? How much time are you willing to spend
on monitoring your portfolio? How much effort do you want to put into
enhancing your investing acumen? Let these answers guide you as you compare
ETFs and mutual funds.

And keep in mind, some investors still prefer to build their own portfolios
rather than use either ETF or mutual funds.

Carefully consider the investment objectives, risks, charges, and expenses

before investing. A prospectus, obtained by calling 800-669-3900, contains this
and other important information about an investment company. Read carefully
before investing.

*Zero commissions on online, U.S. exchange-listed ETF trades. (Other fees

may apply for trade orders placed through a broker or by automated phone.)
No-Transaction-Fee (NTF) mutual funds are no-load mutual funds for which
TD Ameritrade does not charge a transaction fee. (Please note that mutual funds
and ETFs have other fees and expenses that apply to a continued investment in
the fund and are described in the prospectus.)

Mutual funds are subject to market, exchange rate, political, credit, interest rate,
and prepayment risks, which vary depending on the type of mutual fund.

Diversification does not eliminate the risk of experiencing investment losses.

ETFs can entail risks similar to direct stock ownership, including market,
sector, or industry risks. Some ETFs may involve international risk, currency
risk, commodity risk, and interest rate risk. Trading prices may not reflect the
net asset value of the underlying securities.
What is a Hedge Fund? Examples, Types, and Strategies

What Is a Hedge Fund?

A hedge fund is a limited partnership of private investors whose money is
managed by professional fund managers who use a wide range of strategies,
including leveraging or trading of non-traditional assets, to earn above-average
investment returns.

Hedge fund investment is often considered a risky alternative investment

choice and usually requires a high minimum investment or net worth, often
targeting wealthy clients.

KEY TAKEAWAYS
 Hedge funds are actively managed alternative investments that commonly
use risky investment strategies.
 Hedge fund investment requires a high minimum investment or net worth
from accredited investors.
 Hedge funds charge higher fees than conventional investment funds.
 Common hedge fund strategies depend on the fund manager and include
equity, fixed-income, and event-driven goals.

Understanding the Hedge Fund

The term "hedge fund" defines this investment instrument as the manager of the
fund often creating a hedged bet by investing a portion of assets in the opposite
direction of the fund's focus to offset any losses in its core holdings.

A hedge fund that focuses on a cyclical sector such as travel, may invest a
portion of its assets in a non-cyclical sector such as energy, aiming to use the
returns of the non-cyclical stocks to offset any losses in cyclical stocks.

Hedge funds use riskier strategies, leverage assets, and invest in derivatives
such as options and futures. The appeal of many hedge funds lies in the
reputation of their managers in the closed world of hedge fund investing.

An investor in a hedge fund is commonly regarded as an accredited investor,

which requires a minimum level of income or assets. Typical investors include
institutional investors, such as pension funds, insurance companies, and
wealthy individuals.

Investments in hedge funds are considered illiquid as they often require

investors to keep their money in the fund for at least one year, a time known as
the lock-up period. Withdrawals may also only happen at certain intervals such
as quarterly or bi-annually

Types of Hedge Funds

Hedge funds target select investments and pools of securities primed for gains.
Four common types of hedge funds include:

Global macro hedge funds are actively managed funds that attempt to profit
from broad market swings caused by political or economic events.
An equity hedge fund may be global or specific to one country, investing in
lucrative stocks while hedging against downturns in equity markets by shorting
overvalued stocks or stock indices.
A relative value hedge fund seeks to exploit temporary differences in the prices
of related securities, taking advantage of price or spread inefficiencies.
An activist hedge fund aims to invest in businesses and take actions that boost
the stock price which may include demands that companies cut costs,
restructure assets or change the board of directors.
Common Hedge Fund Strategies
Hedge fund strategies cover a broad range of risk tolerance and investment
philosophies using a large selection of investments, including debt and equity
securities, commodities, currencies, derivatives, and real estate.

Common hedge fund strategies are classified according to the investment style
of the fund's manager and include equity, fixed-income, and event-driven goals.

A long/short hedge fund strategy is an extension of pairs trading, in which

investors go long and short on two competing companies in the same industry
based on their relative valuations.

A fixed-income hedge fund strategy gives investors solid returns, with minimal
monthly volatility and aims for capital preservation taking both long and short
positions in fixed-income securities.

An event-driven hedge fund strategy takes advantage of temporary stock

mispricing, spawned by corporate events like restructurings, mergers and
acquisitions, bankruptcy, or takeovers.
How Do Hedge Funds Make Money?
Australian investor Alfred Winslow Jones is credited with launching the first
hedge fund in 1949 through his company, A.W. Jones & Co. Raising $100,000,
he designed a fund that aimed to minimize the risk in long-term stock investing
by short-selling, now referred to as the long/short equities model.

In 1952, Jones converted his fund to a limited partnership, added a 20%

incentive fee as compensation for the managing partner, and became the first
money manager to combine short selling, the use of leverage, and a
compensation system based on performance.
2

Today, hedge funds employ a standard "2 and 20" fee system, a 2%
management fee, and a 20% performance fee.
1
The management fee is based on the net asset value of each investor's shares, so
an investment of $1 million garners a $20,000 management fee that year to
cover the operations of the hedge and compensate the fund manager.
The performance fee is commonly 20% of profits. If an investment of $1
million increases to $1.2 million in one year, $40,000 is the fee owed to the
fund.

Hedge Fund vs. Mutual Fund

Hedge funds differ from mutual funds and hedge funds are not as strictly
regulated by the Securities and Exchange Commission (SEC) as mutual funds
are.

Mutual funds are a practical cost-efficient way to build a diversified portfolio of

stocks, bonds, or short-term investments and are available to the general public
and average investor.

Hedge funds can only accept money from accredited investors which includes
individuals with an annual income that exceeds $200,000 or a net worth
exceeding $1 million, excluding their primary residence. These investors are
considered suitable to handle the potential risks that hedge funds are permitted
to take.
4

A hedge fund can invest in land, real estate, stocks, derivatives, and currencies
while mutual funds use stocks or bonds as their instruments for long-term
investment strategies.

Unlike mutual funds where an investor can elect to sell shares at any time,
hedge funds typically limit opportunities to redeem shares and often impose a
locked period of one year before shares can be cashed in.

Hedge funds employ the 2% management fee and 20% performance fee
structure. In 2021, the average expense ratio across all mutual funds and
exchange-traded funds was 0.40% for the average investor.

What to Consider Before Investing

As investors research to identify hedge funds that meet their investment goals,
they often consider the fund or firm's size, the track record and longevity of the
fund, the minimum investment required to participate, and the redemption
terms of the fund.

According to the SEC, investors should also do the following when deciding to
invest in a hedge fund:

Read the hedge fund’s documents and agreements which contain information
about investing in the fund, the strategies of the fund, the location of the fund,
and the risks anticipated by the investment.
Understand the level of risk involved in the fund’s investment strategies and
that they equate with personal investing goals, time horizons, and risk
tolerance.
Determine if the fund is using leverage or speculative investment techniques
which will typically invest both the investors’ capital and the borrowed money
to make investments.
Evaluate potential conflicts of interest disclosed by hedge fund managers and
research the background and reputation of the hedge fund managers.
Understand how a fund’s assets are valued as hedge funds may invest in highly
illiquid securities and valuations of fund assets will affect the fees that the
manager charges.
Understand how a fund's performance is determined and whether it reflects
cash or assets received by the fund as opposed to the manager’s estimate of the
change in the value.
Understand any limitations to time restrictions imposed to redeem shares.
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Examples of Hedge Funds
As of 2022, the most notable hedge funds include:

Elliot Management Corporation with a 55-year-long history and over $50

billion in assets under management (AUM). Its core holdings are in the energy
sector.
Bridgewater Associates is a global leader, with more than $235 billion in assets
AUM, and a rate of return of 32% for the first half of 2022.
• Man Group offers a mix of long/short equity funds, private market funds, real
estate funds, multi-asset funds, and fixed funds and its core value is responsible
investing, which it achieves through its funds’ compliance with environmental,
social, and governance ESG investing goals.

What Tools Do Investors Use to Compare the Performance of Hedge

Funds?
Investors look at the annualized rate of return to compare funds and reveal
funds with high expected returns. To establish guidelines for a specific strategy,
an investor can use an analytical software package such as Morningstar to
identify a universe of funds using similar strategies.

How Do Hedge Funds Compare to Other Investments?

Hedge funds, mutual funds, and exchange-traded funds (ETFs) all are pools of
money contributed by many investors that aim to earn a profit for themselves
and their clients.

Hedge funds are actively managed by professional managers who buy and sell
certain investments with the stated aim of exceeding the returns of the markets,
or some sector or index of the markets. Hedge funds aim for the greatest
possible returns and take the greatest risks while trying to achieve them. They
are more loosely regulated than competing products, with the flexibility to
invest in options and derivatives and esoteric investments that mutual funds
cannot.

Why Do People Invest in Hedge Funds?

A wealthy individual who can afford to diversify into a hedge fund might be
attracted to the reputation of its manager, the specific assets in which the fund
is invested, or the unique strategy that it employs.

The Bottom Line

Hedge fund investment is considered a risky alternative investment choice and
requires a high minimum investment or net worth from accredited investors.
Hedge fund strategies include investment in debt and equity securities,
commodities, currencies, derivatives, and real estate. Hedge funds are loosely
regulated by the SEC and earn money from their 2% management fee and 20%
performance fee structure.