Investment funds are pools of capital that are combined with a common investment objective for the purpose of generating a positive return. When a group of people wants to leverage either the buying power of a larger pool of capital than they can individually control, or they wish to benefit from a standardized return based on the guidance of a professional money manager, an investment fund is a vehicle by which these goals may be achieved. An individual may not have sufficient funds to invest in a well diversified group of securities, like the S&P 500 for example. If he or she buys shares in a fund that has sufficient capital to own all of the stocks in the index, the investor can achieve the same return without the complication of trying to manage five hundred stocks with only a small amount of capital.
Another major advantage of an investment fund is that it allows a small investor to get professional money management by combining his or her funds with those of others. The manager or fund company puts together a prospectus – a document that outlines the goals and constraints of a given fund – and individuals contribute money if they wish to participate in the proposed strategy. The manager is then able to negotiate lower fees (like trading commissions and custody fees), and he can focus on the overall approach. Because the capital is pooled, the manager does not need to allocate each trade to an individual account. This would be both time consuming and difficult to do fairly. The combined fund can be managed according to the proscribed guidelines for the overall benefits of all of the fund participants. While there are a nearly infinite number of funds that invest in a broad spectrum of strategies, there are specific ones that can meet the needs of almost any investor.