What is a fund?

If you have followed the previous episodes of Julius Baer’s How To Invest series, you’ll already know that you should diversify your investments as much as possible.

Imagine you want to invest in the global stock market. You would have to sit down and try to identify the best companies out of 195 countries. Who has the time and skill to do that? This is where funds come in handy. Think of a fund like a basket of investments. Instead of putting all your money in one stock, you invest in a collection of stocks, or bonds, or commodities - you name it! 

How does a fund work?

Let’s have a look at the broadly known MSCI World Index Fund as an example to understand the logic a little better.

Here’s how it works:

1. You invest $1,000 into a MSCI World Index Fund, which is designed to replicate the performance of the MSCI World Index.
2. The fund manager uses your $1,000, along with money from other investors, to buy a representative sample of stocks from the MSCI World Index. This might include companies like:
   • Apple (US)
   • Nestle (Switzerland)
   • Toyota (Japan)
   • Royal Dutch Shell (UK/Netherlands)
   • and hundreds of other companies
3. The fund manager ensures that the weights of each stock in the fund are similar to their weights in the MSCI World Index. This means that the fund will have a similar sector and geographic breakdown to the index.
4. The fund manager continuously monitors the index and makes adjustments to the fund’s holdings as needed to ensure it remains aligned with the MSCI World Index.

The advantages and disadvantages of investing in funds

Funds are a great option for many investors, and for many different reasons. They help you diversify by spreading your money across multiple assets, reducing risk. But crucially they also help you manage your emotions. Many investors try to time the market but often fail to do so. But best of all, funds are easy to access. You don’t need a finance degree to start investing.

But of course - investing, even if it’s in funds, isn’t all sunshine and profits. Before you invest make sure you understand the fee structure. That’s how much you pay for accessing and holding a fund. You should expect to pay for the active management of a fund, but some funds have high management costs that can eat into returns. You should also understand that even diversified funds are impacted by market risks. Furthermore, not all funds let you cash out instantly, so make sure you also have a diverse series of fund options that can help you manage these challenges.

Understanding different fund types: mutual-, exchange-traded- & hedge funds

Let’s take a look at the three key types of funds in more detail: First up is the traditional (or mutual) fund. A mutual fund pools money from multiple investors to buy a diversified selection of stocks, bonds, or other assets. Traditional funds tend to be long-only funds, so you buy and hold it for a longer period of time. But the fund universe is vast, so there is a huge amount of choice within funds. In equities, for example, there are different sectors and regions. In bonds, there is corporate debt and government debt. With both you can look at developed or developing markets. 

Crucially, however, you can only buy or sell at the day’s closing price, not in real-time. This is important because it differentiates traditional funds from Exchange traded funds, or ETFs. ETFs are similar to traditional funds but trade like stocks on an exchange. Most ETFs are passively managed, tracking an index (like the S&P 500, Nasdaq or MSCI as mentioned before). Others are actively managed. An actively managed fund is a type of investment fund where the portfolio manager or investment team uses their expertise, research, and judgment to make intentional decisions about which securities to buy, hold, or sell. The goal is to outperform a specific benchmark or index, such as the S&P 500, by actively selecting investments that are expected to perform well. You can buy and sell ETF shares at any time during the trading day, known as intra-day trading, just like stocks. 

Different fund types for each destination

Funds can be tailored for different objectives: capital growth, income, risk mitigation or access to specific industries, geographies or emerging themes. Understanding the types of funds available helps you select the right aircraft for your route – be it speed, range or on-board service you’re prioritising.

Mutual funds, also known as traditional funds, are among the most familiar types. These highly regulated vehicles allow investors to pool resources and gain exposure to a diversified mix of equities, bonds or both. For example, a busy entrepreneur may want global equity exposure but lacks time to analyse individual markets. A mutual fund focused on innovation delivers that reach, much like a pre-arranged flight plan, through management by professionals with deep sector knowledge.

Exchange-traded funds (ETFs) offer similar diversification but trade on exchanges like stocks, providing liquidity and often lower fees. Suppose a family office is interested in sustainable investing. An ETF tracking an index of ESG-aligned companies allows them to tap into that theme with efficiency and transparency.

Investment funds: features at a glance

Finally, a very important asset class: hedge funds. These are private investment funds that use advanced strategies - short selling, leverage, derivatives, and alternative assets - to try to generate high returns. They are usually only interesting for more sophisticated investors who have knowledge and experience in the field. Because they are subject to fewer regulations, investors need to do their own due diligence or work with managers who do that for them. Unlike mutual funds and ETFs, hedge funds often have lock-up periods. This means that investors may have to wait months or years to withdraw funds. However, they work very well combined with more traditional fund strategies in building a portfolio. 

And if that is still too much deciding for you -  a Fund of Funds is a fund that invests in other funds. Mostly these are hedge funds or other alternative investments, but they cover the traditional ground too. It’s like a super-layered investment cake, offering extra diversification both in strategy and managers. Even though it sometimes comes with higher fees, It can be an interesting option, especially when it comes to private markets.

Thematic and values-based funds: investing with purpose and passion

One of the key advantages of funds is that you can achieve a diversified approach while focusing on what matters to you.

Thematic Investing focuses on big trends such as clean energy, AI, or healthcare. At Julius Baer we call these our Next Generation topics. You can diversify further by focusing on demographic and social trends like longevity-related industries, or geopolitical and policy-driven themes such as infrastructure. You can even align your values with your investment portfolio with many products out there acknowledging Islamic law or Jewish ethics for example. When it comes to thematic investing, however, you have to carefully weigh them as part of an overall portfolio. As a general rule one should allocate around 5% to thematic investments to maintain diversification. 

Never forget to focus on the big picture

Whether you’re new to investing or looking to step up your game, funds can offer a smart, diversified way to grow your wealth. But do not forget that they are also subject to the ups and downs of the financial markets and should be used as part of a balanced portfolio strategy, aligned with your investment objectives, risk appetite and time horizon.

Check out Julius Baer’s How to Invest guide (see below) and How to Invest series on Youtube for more insights like this. Don’t forget to like and subscribe so you don’t miss an episode!