Funds are financial resources set aside for a specific purpose. For example, an emergency fund is money set aside in case of emergencies like illnesses or unemployment. On the other hand, trust funds are assets managed by a board of trustees on behalf of a beneficiary.
In finance, the term funds specifically refer to investment funds, which can be defined as a collective investment scheme in which investors pool their capital for joint investment. These type of funds are beneficial to investors for the following reasons:
1. No need for large up-front investments. Individuals with limited funds will find it impossible to buy stocks in a large and established company. This means that those with smaller funds will need to invest their money in smaller and probably more volatile stocks, which could lead to more losses than gains. By participating in collective schemes such as investment funds, the individual investor will get the benefit of being able to share in a fund that owns stocks in big companies.
2. Diversified portfolio. Diversifying is also nearly impossible with less funds. It doesn’t make sense to buy just a share or two of stock (aside from the fact that stocks are usually sold by block) in big companies. Investment funds usually have diversified portfolios, which means instant diversification for its investors.
3. Professional management. Investment funds are managed by professionals called fund managers. They are paid to ensure that risks are minimized, while profit is maximized.