What is a fund? Focus on the investment solution
These are the main differences between equities and funds that investors should know.
The difference between funds and equities
Investors can invest in both individual securities and funds. An individual security is a particular investment, for example, a company's share, a government bond or a corporate bond. A fund, on the other hand, is a “basket” of several different securities. These securities are usually put together according to a specific focus: for example, by sector, region, security type or a variety of other criteria. Using equities and equity funds as an example, we’ll now illustrate the main differences between individual securities and funds that investors should know.
What is an equity?
If you buy an equity, you acquire a small share in a company in the form of this security. This means that you become a “co-owner” of this company. Equities are traded on exchanges. Their price depends on supply and demand and can fluctuate accordingly in trading. The equity grants shareholders various rights, such as the right to participate in the annual general meeting or the right to receive part of the company’s profits: this is known as a dividend.
Equities are a popular form of investment. They offer the potential to generate returns for investors through price increases and dividend payments. However, equities are also associated with risks. This is because there is no guarantee of profits, the share price can fluctuate greatly and, in the worst case, there is even a risk of the total loss of the capital committed. Investing in equities therefore requires careful planning from investors in order to be able to assess the opportunities and risks effectively.
What is a fund?
Investment funds are collective investment vehicles. They therefore pool the capital of many investors in order to invest it in a wide range of securities, for example. Depending on the fund, these may be equities, bonds, real estate or other assets. Mixed or strategic funds, on the other hand, invest in different asset classes. Active investment funds are managed by fund managers. They make investment decisions and monitor the portfolio to achieve the best possible return for investors.
A major advantage of investment funds is risk diversification, as the invested capital is generally distributed across many different securities. This diversification can reduce the risk associated with investing in individual securities. This is because any losses in one security can be offset by potential profits in another. Investment funds also offer investors a convenient way to invest in different markets and asset classes. They can do so without having to acquire extensive market knowledge or invest time in administration. There are different types of investment funds. A distinction is made between active and passive instruments, among others.
Unlike actively managed funds that are overseen by fund managers, index funds track a predefined index. Investors participate in the development of an underlying index. ETFs (exchange-traded funds) are index funds that can be bought and sold on an exchange like equities. They are usually cost-effective because they are passively managed. This makes it a popular choice for investors looking for an easy and efficient way to invest in different markets.
