Types of Funds: Your Complete Guide to Investment & Fund Management

What are Funds?

A fund refers to a collection of money from multiple investors, pooled together for a specific investment purpose. This sum is managed by a fund manager, who strategically invests it in a range of financial assets such as stocks, bonds, and other securities to achieve returns. These returns are then distributed to investors based on the number of units they hold in the fund.

At the same time, it’s worth emphasising that funds are not limited to investment purposes. They can also be set aside for goals such as retirement, education, or emergency savings.

Some of the key examples of funds include —

Mutual Funds
Pension Funds
Hedge Funds
Scholarship Funds

Policy Term

Amount

Payment Frequency

YearlyMonthly

Funds Key Points

Key Points

Pooling of Money: Multiple investors combine their capital for a common purpose
Fund Manager: A professional who manages the fund and makes investment decisions
Returns: Money earned through investments is distributed to investors

How Do Funds Work?

Funds work by pooling capital from various investors and investing it across a range of assets. The fund manager, using their expertise and market research, selects investments that align with the fund’s objectives. The aim is to generate returns for the investors. General Steps in Fund Operations

General Steps in Fund Operations

Fund Creation
Fund Manager Role
Earnings & Returns
Distribution

Investors contribute money to the fund

The fund manager decides how to invest the money in stocks, bonds, real estate, and so on

The fund generates returns from these investments

Investors receive returns based on their share in the fund

Different Types of Funds

While there are various types of funds designed to cater to different investment goals and risk profiles, the most common ones include —

Emergency Funds	Purpose: Set aside money for unexpected situations like job loss or medical emergencies How it Works: Individuals set aside money in a separate savings account or deposit Recommended Amount: Typically, 3-6 months of living expenses
Education Funds	Purpose: Save for education expenses, usually through tax-advantaged accounts How it Works: Parents or guardians invest money in these funds for their child’s future education
Retirement Funds	Purpose: To provide income after retirement How it Works: Individuals contribute to pension funds or retirement savings plans, which are invested to grow over time
Trust Funds	Purpose: A legal arrangement where assets are managed by a trustee for the benefit of a beneficiary How it Works: A grantor sets up the trust — the trustee manages and distributes the assets as per the terms
Investment Funds	Investment funds come in different forms depending on the investment strategy, risk level, and target market.
Government Funds	Government funds are financial resources set aside by governments for specific purposes.

Types of Investment Funds

Here are some of the most common ones —

1. Mutual Funds

Mutual funds collect money from individual investors and invest it in a diverse portfolio of stocks, bonds, and other assets. These funds are managed by professionals.

Best For: Beginners and those seeking diversification with moderate risk.

2. Exchange-traded Funds (ETFs)

ETFs are similar to mutual funds but bought and sold on stock exchanges like individual stocks.

Best For: Investors looking for flexibility and lower costs

3. Hedge Funds

These are high-risk, high-reward funds aimed at generating returns through sophisticated strategies like short selling and leverage.

Best For: High-net-worth individuals (HNWIs) or institutions willing to take higher risks

4. Government Bond Funds

Government bond funds are for investors who want low-risk investments. These funds invest in Treasury bonds or debt from agencies.

Best For: Conservative investors seeking safety and stable returns

Types of Government Funds

These funds help the government manage operations, repay debts, and invest in public projects.

Debt-Service Funds	Purpose: Debt-service funds are used by the government to pay back its debts, including interest and principal repayments How it Works: Governments accumulate money in these funds to ensure they can meet their debt obligations and avoid defaults
Capital Projects Funds	Purpose: These funds finance capital projects such as building new infrastructure, acquiring technology, or renovating public buildings How It Works: Capital project funds are used for long-term investments in the country’s physical and technological infrastructure
Permanent Funds	Purpose: Permanent funds are investment funds that the government cannot spend directly. The principal (original investment) is kept intact, but the income generated from these investments can be used for government operations. How It Works: The government invests money into assets such as stocks, bonds, or real estate. The earnings from these investments can be used for public services.

Performance of Investment Funds

The performance of an investment fund refers to how well the fund has done over a certain period. This is primarily measured by the returns it has generated for its investors.

These returns can come in two forms —

Income: This refers to any earnings the fund generates, such as dividends from stocks or interest from bonds
Capital Gains: This is the profit earned from the appreciation in the value of the fund’s assets (e.g., stocks or real estate) over time

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Factors Affecting Funds Performance

When evaluating an investment fund, consider the following factors to understand its performance —

Factor	Impact on Fund Performance
Market Conditions	Economic factors like inflation, interest rates, and overall market sentiment can cause a fund’s value to rise or fall
Management Skill	The expertise and decisions made by the fund manager can greatly influence returns — skilled managers typically lead funds to better performance
Investment Strategy	The fund’s approach (growth, income, or balanced) determines the level of risk and potential returns

By understanding these factors, you can better assess the likely performance of a fund and choose one that aligns with their risk tolerance and financial goals.

Things to Know About Fund Management in the UAE

Effective fund management is crucial to ensure that funds meet their investment goals and provide maximum returns for investors.

Here’s how fund management works —

Diversification	Active vs Passive Management	Risk Management
By spreading investments across different asset classes, a fund manager minimises risk	Active management involves constantly buying and selling assets to maximise returns, while passive management follows a set strategy or index	The manager assesses potential risks and adjusts the fund’s portfolio accordingly

In the UAE, fund management has specific regulations that govern how funds can be marketed and sold. One such change is the Securities and Commodities Authority (SCA) regulation, effective from April 1, 2024.

Which Fund is the Best for Beginners?

Investing in funds is one of the easiest ways to enter the financial markets.

For beginners, starting with low-risk mutual funds can provide exposure to both the equity and debt markets without too much risk at once. However, it’s worth mentioning that there’s no ‘one size fits all’ with investment — you need to choose funds based on your financial goals, risk tolerance, and investment timeline.

Tips for Beginners

Start with Low-Risk Funds: As a beginner, consider funds that focus on government bonds, large-cap stocks, or dividend-paying companies
Use Systematic Investment Plans (SIP): SIPs allow you to invest a fixed amount in a fund regularly. This averages out the cost of your investments and helps in long-term growth.
Consult a Professional: A financial advisor can help you assess your risk tolerance and choose the best funds for your needs
Look for Diversified Funds: Mutual funds that invest in a variety of assets, such as stocks and bonds, provide greater diversification and reduce risk

Recommended Funds for Beginners

Low-Risk Funds: Government bond funds, large-cap equity funds, and balanced funds
SIP Route: Beginners can start with SIP in mutual funds to invest smaller amounts consistently over time.

Fund Management in UAE