The Basics of Investment Funds
Table of Contents
Investment funds offer a way to pool money with other investors to purchase a collection of securities or other assets. They can make investing more accessible by allowing individuals to gain exposure to a range of investments without having to select and manage each one independently.
There are several types of investment funds, including mutual funds, exchange-traded funds (ETFs), and money market funds. Some focus on stocks or bonds, while others combine different asset classes or follow a particular investment strategy. Funds also vary in how they are managed, how much they cost, and how investors buy and sell shares.
Understanding how investment funds work and how different types compare can help investors evaluate their options and determine whether a particular fund aligns with their financial goals, time horizon, and risk tolerance.
Key Points
• Investment funds pool money from multiple investors to purchase a portfolio of securities or assets.
• Common fund types include mutual funds, exchange-traded funds (ETFs), index funds, and money market funds.
• Funds offer potential benefits such as diversification, simplified portfolio management, and access to different markets.
• Investors pay operating fees and expenses, such as expense ratios, which can impact potential returns.
• Investment funds carry risks, and investors can lose money depending on market conditions and underlying holdings.
What Is an Investment Fund?
An investment fund pools money from multiple investors to purchase a portfolio of financial securities or other assets. Investors own shares or units representing a proportional interest in the fund’s holdings.
Investment funds can provide access to a broader range of investments than an individual might be able to purchase independently. They also allow investors to share certain costs associated with managing a portfolio.
Common types of investment funds include mutual funds, exchange-traded funds (ETFs), money market funds, and alternative funds. Some funds are actively managed by professional investment managers who select investments based on the fund’s objectives. Others follow a passive strategy designed to track a market index.
Investors generally pay fees and expenses associated with operating a fund. These costs vary depending on the fund’s structure, investment strategy, and management approach.
Types of Investment Funds
Investment funds can be categorized by how they are structured, what they invest in, or the strategies they follow. Some categories overlap, meaning a single fund may fit into more than one.
Mutual Funds
A mutual fund pools money from investors to purchase a portfolio of securities, such as stocks, bonds, and short-term debt instruments.
Mutual funds can provide investors with access to a diversified portfolio through a single purchase. Rather than buying individual securities and managing them independently, investors can purchase shares in a fund that holds a collection of investments.
For example, an individual with $1,000 may find it difficult to purchase every stock in the S&P 500 and maintain the same proportions as the index. A mutual fund that tracks the S&P 500 can provide exposure to those companies through a single investment, subject to the fund’s minimum investment requirements and fees.
Mutual funds can follow different investment strategies. Some are actively managed, meaning a portfolio manager selects and adjusts investments in an effort to achieve the fund’s objective. Others are passively managed and seek to track a particular market index.
Exchange-Traded Funds (ETFs)
Like mutual funds, ETFs can provide exposure to multiple investments through a single purchase. They may hold stocks, bonds, commodities, or other assets, depending on their objectives.
One key difference is how investors buy and sell shares. ETFs trade on stock exchanges throughout the trading day, much like individual stocks. Their market prices can fluctuate during the day and may differ slightly from their net asset value (NAV).
ETFs can be actively or passively managed. Some track market indexes, while others follow specific investment strategies.
Index Funds
Index funds are designed to track the performance of a particular market index, such as the S&P 500 or the Russell 2000. Rather than attempting to outperform a benchmark through individual security selection, an index fund generally seeks to replicate the index’s holdings or performance, before fees and expenses.
Index funds can invest in stocks, bonds, or other assets. They are often passively managed, which can result in lower operating expenses and less portfolio turnover than some actively managed funds.
Index funds may provide exposure to broad markets or narrower segments, such as large-cap stocks, small-cap stocks, particular sectors, or international markets.
Although index funds are often diversified, their level of diversification depends on the index they track. A fund that follows a narrow sector index, for example, may be more concentrated than one that tracks a broad market index.
An index fund can be structured as either a mutual fund or an ETF. For example, an S&P 500 index fund may be available as a traditional mutual fund or an ETF.
Bond Funds
Bond funds invest primarily in bonds and other debt securities issued by governments, corporations, and other entities. Depending on their objectives, bond funds may hold short-term or long-term bonds, government securities, corporate bonds, municipal bonds, or a combination of these investments.
Bond funds can provide income through interest payments received from their underlying holdings. However, unlike an individual bond held to maturity, a bond fund does not promise to return a specific principal amount on a particular date.
Bond funds carry risks, including interest rate risk and credit risk. Their share prices can decline when interest rates rise or when the credit quality of their underlying holdings deteriorates.
Bond funds may be structured as mutual funds or ETFs.
Balanced Funds
Balanced funds, also known as asset allocation funds, invest in a combination of stocks and bonds. Some also hold cash or other assets. These funds generally maintain a relatively consistent allocation between asset classes, such as 60% stocks and 40% bonds, although the specific allocation varies by fund.
By combining different types of investments, balanced funds seek to provide a mix of growth potential and income while reducing reliance on any single asset class. However, diversification does not eliminate the risk of loss.
Balanced funds can be structured as mutual funds or ETFs.
Target-Date Funds
Target-date funds are designed for investors with a particular goal or time horizon, such as retirement in a specific year. These funds typically hold a mix of stocks, bonds, and other investment funds. Their investment allocation generally becomes more conservative as the target date approaches, although the specific strategy varies by fund.
For example, a target-date retirement fund designed for someone retiring in 2060 may initially hold a relatively high allocation to stocks. Over time, it may gradually shift toward a larger allocation to bonds and other less volatile investments.
Target-date funds, which may be structured as mutual funds or ETFs, can simplify portfolio management by automatically adjusting their asset allocation. However, they do not guarantee a particular return or retirement income, and investors can still lose money.
Money Market Funds
Money market funds are mutual funds that invest in short-term, high-quality debt securities, cash, and cash equivalents. Depending on the fund, holdings may include U.S. Treasury securities, certificates of deposit, commercial paper, or short-term municipal securities.
Money market funds generally have lower risk than many other types of mutual funds, but they are not risk-free. They typically seek to maintain a stable net asset value, often $1 per share, but their share price can fluctuate.
Money market funds are also different from money market accounts offered by banks and credit unions. Money market funds are investments and are not FDIC-insured.
Alternative Funds
Alternative funds invest in assets or use strategies that differ from traditional stock and bond investing. Depending on the fund, these investments may include real estate, commodities, private equity, private debt, or other specialized assets. Some alternative funds also use strategies such as short selling or derivatives.
Alternative funds can diversify your risk and potential returns, but they often come with higher fees, complex structures, and less liquidity.
Some funds focus on real estate investment trusts (REITs), companies involved in commodities production, or other specialized markets. The risks vary considerably depending on the fund’s holdings and strategy.
What Are the Benefits of Investment Funds?
Investment funds offer several features that may appeal to investors. However, their benefits depend on the fund’s structure, investment strategy, and costs.
Diversification
Investment funds can provide exposure to a range of investments through a single purchase. Rather than relying on the performance of one company or security, investors may own shares in a fund that holds securities from multiple companies, industries, or asset classes.
Diversification can help reduce the impact of poor performance by an individual investment. For example, losses in one stock may be offset by gains or smaller losses in other holdings. However, diversification does not guarantee a profit or eliminate the risk of loss. A fund that focuses on a single sector or market segment may also offer less diversification than a broad-market fund.
Access to Different Markets
Investment funds can make it easier for investors to gain exposure to different types of securities, markets, and investment strategies. For example, a fund may focus on international stocks, corporate bonds, real estate, or a particular market index.
This can allow investors to access investments that may otherwise be more difficult or expensive to purchase individually. The types of investments available depend on the fund’s objectives and holdings.
Simplified Portfolio Management
Investment funds can simplify investing by allowing investors to purchase a collection of securities through a single investment. Depending on the fund, professional managers may select investments, monitor the portfolio, and make adjustments as needed. Passively managed funds generally require less frequent portfolio trading because they follow an index.
Some funds also allow investors to set up recurring purchases and automatically reinvest dividends or capital gains distributions. Reinvesting distributions can increase the number of shares an investor owns over time. However, distributions are not guaranteed, and the value of the investment can still decline.
Different Management Strategies
Investment funds offer a range of approaches to managing money. Actively managed funds use investment selection and portfolio management in an effort to achieve a particular objective. Passively managed funds generally seek to track a market index.
Investors can compare these approaches based on their objectives, costs, and investment strategies. Neither approach guarantees positive returns or outperformance.
Liquidity
Many investment funds allow investors to buy or sell shares relatively easily, although the timing and process vary. Traditional mutual funds generally process purchases and redemptions at the next calculated net asset value (NAV), typically determined after the market closes. ETFs trade on stock exchanges throughout the trading day. Their prices may fluctuate during market hours and can differ slightly from their NAV.
Some alternative funds may have limited liquidity or restrictions on when investors can redeem their shares. Investors will want to review a fund’s terms before purchasing shares.
What Are the Costs of Investment Funds?
Investment funds generally charge fees and expenses for operating and managing the fund. These costs vary depending on the fund’s structure and strategy.
One common cost is the expense ratio, which represents a fund’s annual operating expenses as a percentage of its assets. Expense ratios vary widely. Actively managed funds often have higher expense ratios than comparable passively managed funds, although this is not always the case. Some funds may also charge sales loads, transaction fees, redemption fees, or other expenses.
Investors can review a fund’s prospectus and fee information to understand its costs before purchasing shares. Comparing expenses can help investors understand how fees may affect investment returns over time.
Can I Lose Money in an Investment Fund?
Yes. Investment funds are investments, and their value can decline. Investors may lose some or all of the money they put into a fund if the value of its underlying holdings falls significantly. The level of risk depends on the fund’s investments and strategy.
For example, a stock fund may experience substantial losses during a market downturn, while a bond fund may lose value when interest rates rise or issuers experience financial difficulties. Even money market funds carry some risk.
Before purchasing an investment fund, investors can review its prospectus, investment objectives, holdings, historical performance, fees, and risks. Understanding these details can help investors evaluate whether a fund is consistent with their financial goals, time horizon, and risk tolerance.
The Takeaway
Investment funds offer a way to pool money with other investors and gain exposure to a collection of securities or other assets. Mutual funds, ETFs, index funds, and other investment funds come in many forms, with different objectives, strategies, costs, and levels of risk.
Understanding how these funds work and what they hold can help investors evaluate their options and make informed decisions about how investment funds may fit into their broader financial plans.
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FAQ
What are the four types of investment funds?
Four common types of investment funds are mutual funds, exchange-traded funds (ETFs), index funds, and money market funds. Mutual funds and ETFs pool money to purchase a portfolio of securities, while index funds seek to track a particular market index and can be structured as mutual funds or ETFs. Money market funds invest in short-term, high-quality debt securities and cash equivalents. Other types include bond funds, balanced funds, and target-date funds.
What is an example of an investment fund?
An S&P 500 index fund is an example of an investment fund. It pools money from investors to purchase stocks that track the S&P 500, an index of large U.S. companies. Investors can gain exposure to a broad group of companies through a single fund rather than purchasing shares of each company individually. Other examples include bond funds, money market funds, and target-date retirement funds.
How does an investment fund work?
An investment fund pools money from multiple investors to purchase a collection of securities or other assets. Investors purchase shares or units representing a proportional interest in the fund’s holdings. Depending on the fund’s strategy, a professional manager may select investments, or the fund may passively track a market index. Investors may receive income through dividends or interest, and the value of their shares can fluctuate based on the performance of the underlying assets. Funds generally charge fees and expenses for their operation and management.
What are the top five investment funds?
There is no universal ranking of the top five investment funds. The right fund depends on an investor’s financial goals, time horizon, risk tolerance, and investment strategy. Five common categories to research include:
• S&P 500 index funds: Track large U.S. companies.
• Total stock market index funds: Provide exposure to a broad range of U.S. stocks.
• International stock funds: Offer exposure to companies outside the United States.
• Bond funds: Invest in debt securities and may provide income.
• Target-date funds: Adjust their asset allocation over time based on a specified goal date.
Investors can compare individual funds within these categories by reviewing their objectives, holdings, fees, and risks.
This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Mutual Funds (MFs): Investors should read and carefully consider the information contained in the prospectus, which contains the Mutual Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or SoFi's customer service at: 1.855.456.7634. Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risks. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may have tax implications.
Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor fully protect in a down market.
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