A fund is capital belonging to numerous investors, held in one place and used to collectively purchase securities, while each investor retains ownership and control of his own shares. Buying large numbers of shares or achieving a portfolio of investments may well be beyond most average investors so they effectively club together to increase their purchasing power.
Typically, these pools of money are run and managed by an investment specialist. The manager is paid to make the day-to-day decisions of where the pooled money is invested. The fund manager uses their expertise to make suitable investment decisions in order for the value of the pooled fund to hopefully grow over time.
Another advantage of pooled investment is being able to diversify.
Diversification and Risk
All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount originally invest. To enable funds to be able to manage risk, the manager will practice some level of diversification. This works on the premise that holding two different shares is better than two of the same shares. This is because all shares react differently to investment conditions and changes.
For example, imagine that there are only two companies, one company making t-shirts and one company making woolly jumpers. If the weather forecast is for sunshine, then investors would be wise to buy shares in the t-shirt company as they expect demand for t-shirts to increase and sales to rise, increasing the company share price. However, we know that it is not always sunny and therefore a good manager would buy shares in both companies, so when one share price is static or even falling, the other is able to support and perhaps offset the falls, meaning that the investor doesn’t suffer a loss.
The value of investments may fall as well as rise. You may get back less than you originally invested.