Illustration of an investment fund the complete guide for beginners

Investing is an effective way of achieving long-term financial goals, such as retirement. It also helps to combat inflation by generating interest on your money. Today, there are different types of investment to suit every investor profile, from property crowdfunding and non-trading property investment companies (SCPIs) to rental investments and a variety of other projects. Entering the world of investment funds offers a gateway to this wide range of options, encompassing equities, bonds, ETFs, real estate and much more, enabling you to diversify your portfolio and maximise the return on your investments.

This article aims to serve as a comprehensive guide for beginners interested in investment funds, covering their definition, operation, key benefits, as well as the different types of funds available, such as hedge funds, private equity, and dividend opportunities. It will also cover risk management strategies, differentiating between active and passive management, to help investors choose the fund best suited to their needs to optimise their personal finances.

Definition and Operation of an Investment Fund

An investment fund is a financial structure that pools the capital of several investors to invest in a diversified portfolio of financial assets, such as equities, bonds or property. The main advantage of this approach is the pooling of risk, as investments are spread over different assets, reducing the overall risk for each individual investor.

How an investment fund works

  1. Raising capital Investors contribute capital to the fund, which is then used to acquire financial assets.
  2. Management by professionals The fund is managed by professional fund managers who decide which assets to buy or sell, based on the fund's objective and market conditions.
  3. Yield distribution Gains generated by investments (interest, dividends, capital gains) are distributed to investors, generally in proportion to their contribution to the fund.
  4. Reinvestment or withdrawal Investors can choose to reinvest their gains in the fund or withdraw their units.

Investment funds are regulated by financial authorities, which ensure transparency and investor protection. These regulations ensure that funds operate fairly and in compliance with the financial laws in force.

The key benefits of investment funds

Investment funds offer a number of significant advantages that make them attractive to investors, especially those who are new to investing. Here are some of the key benefits:

  1. Investment diversification Diversification is a key strategy for reducing risk in an investment portfolio. Investment funds give investors access to a wide range of financial assets through a single investment, thereby spreading risk and increasing the chances of stable returns.
  2. Professional Management Investment funds are managed by professional fund managers who have the expertise and resources to analyse the markets and make informed investment decisions. This is a great advantage for investors who do not have the time or experience to manage their own investments.
  3. Accessibility Investing in investment funds generally does not require a high level of initial capital, which makes them accessible to a larger number of investors. In addition, they offer the opportunity to participate in investments that might otherwise be out of reach for an individual investor.
  4. Liquidity Investment funds generally offer good liquidity, which means that investors can buy or sell fund units relatively easily. This is particularly beneficial for those who may need access to their invested capital in the short term.
  5. High Yield Potential Through diversification and professional management, investment funds have the potential to generate high returns. Although all investments carry risks, investment funds seek to maximise returns for their investors while controlling the associated risks.

These advantages make investment funds a very attractive option for investors looking to build up or diversify their investment portfolio.

The different types of investment fund

Let's explore the various types of investment funds available, each offering specific features and benefits depending on investors' objectives and risk tolerance.

Closed-End Funds

Closed-end funds are structures where the number of units is determined in advance. Once all the units have been sold, the fund is closed to new investors. These funds often offer stability, as the capital under management does not fluctuate with capital inflows and outflows.

Open-Ended Funds

Unlike closed-ended funds, open-ended funds allow investors to buy or sell units at any time. This flexibility can be attractive to investors looking to adjust their positions according to market conditions.

Index Funds

Index funds seek to replicate the performance of a benchmark index, such as the S&P 500, and are valued for their transparency and low management fees. They are an attractive option for investors who prefer a passive approach to investing.

Actively Managed Funds

These funds are managed by professionals who try to outperform the market by carefully selecting investments. Although potentially more profitable, they also carry higher management fees and increased risk.

Sectoral Distribution Fund

These funds focus on specific sectors of the economy, such as technology, healthcare or finance, offering investors targeted exposure to industries they consider promising.

Money Market Fund

Ideal for investors looking for a safe option, money market funds invest in high-quality short-term financial instruments. They offer high liquidity and low risk, although their return potential is generally lower.

Bond funds

Investing mainly in bonds, these funds are an option for those looking to generate regular income. They can vary considerably in terms of risk and return, depending on the quality of the bonds chosen and the duration of the investment.

Real Estate Funds

These funds invest in physical property or property-related securities. They offer diversification away from traditional financial assets and can provide rental income as well as capital gains.

Commodity Funds

Commodity funds give investors access to physical assets such as gold, oil or metals. They can be used as a hedge against inflation and market volatility.

Each type of investment fund offers distinct advantages and varying levels of risk, allowing investors to choose those that best match their financial objectives and risk tolerance.

How do you choose the right fund for your portfolio?

Understanding your risk aversion

It is crucial to choose an investment fund that matches your risk profile. This determines the allocation of the fund's assets between different classes, such as equities, bonds or property. Aligning your risk aversion with the fund's profile is essential if you are to achieve your financial goals while controlling your comfort level with market fluctuations. 1.

Objectives and investment horizon

Your investment objectives and time horizon, which are linked to your personal and current situation, must correspond to a specific risk profile. This helps you choose a fund that meets your expectations and needs 1.

Quantitative criteria

Analysing the fund's historical performance, both in absolute and relative terms, is essential. Understanding the fund's behaviour in relation to the general market situation will enable you to better anticipate future performance and assess the fund's stability. 1.

Risk indicators

It is important to monitor the risk of the fund using various indicators, such as volatility and maximum downside. These indicators will help you understand how the fund could perform in extreme market conditions. 1.

Qualitative criteria

Make sure that the fund complies with its stated objectives and investment policy. Understanding the fund manager's investment process and assessing the quality of the management team are key steps in choosing a reliable, well-managed fund. 1.

Diversification

Diversification is an essential strategy for reducing risk. Choose funds that invest in a variety of European sectors, company sizes and geographical areas. This can help spread risk and increase the chances of stable returns. 2.

Management fees and costs

Carefully analyse the various costs associated with an investment, including management fees, fund entry and exit costs, and transaction costs. These costs can significantly affect the net return on your investments. 2.

Market trends

Keep abreast of economic trends, growth sectors and changes in the European economic landscape. This knowledge can help you choose funds positioned to benefit from these trends. 2.

Risk and volatility assessment

For conservative investors, favour low-volatility funds offering moderate returns. For those who can tolerate a higher level of risk, consider funds with greater volatility but higher return potential. 2.

Long-term considerations

For long-term investments, opt for funds with a solid, sustainable growth strategy. For short-term objectives, prefer funds offering good liquidity and relative stability. 2.

Conclusion

In the investment journey, understanding the fundamentals of investment funds and the ability to choose wisely those that match our objectives and risk tolerance is essential. We went through the benefits of investment diversification, the importance of professional management, and the accessibility and liquidity that investment funds offer. In addition, we explored the different types of funds available, each with its own attractive features depending on investment preferences and needs. This knowledge forms the basis for a well-considered and effective investment strategy, geared towards sustainable portfolio growth.

The implications of this information go beyond simple fund selection, underlining the importance of wise financial governance. With this in mind, we invite you to get in touch with our team at Ravel Finance. Together, we can explore the investment solutions best suited to your ambitions, in order to maximise the growth potential of your portfolio. The informed choice of an investment fund, aligned with your personal profile and objectives, is a crucial step towards achieving your financial aspirations.

FAQs

What are the investment options for novices?

Beginners to investing can consider a number of options, such as rental property, dividend stocks and low-cost index funds. These options are often recommended for their long-term growth potential and ability to generate income.

What type of investment can generate rapid gains?

The most effective investment for a quick return is usually the stock market, particularly equity investments, which can offer an average return of 8.5% per annum. It is important to note that high-yield investments often come with a higher risk.

What are the most recommended investment funds?

Among the top venture capital funds in France are Ravel Finance's Smart Hedge Fund, SIDE Capital, XAnge, Axeleo Capital, Alven Capital, Daphni, Newfund Capital, Partech Partners and Kima Ventures. These funds are considered to be the crème de la crème of French venture capital.

What is the most profitable investment in the short term?

In terms of short-term profitability, investments in the stock market and shares are often at the top of the list, with an average return of 8.5% per year. In comparison, the Plan Epargne Logement (PEL) offers a lower return, around 2%, and there are other non-tax-exempt savings accounts such as the Compte Epargne Logement (CEL) that can offer even less.

References

[1] – https://kays-wm.com/blog/comment-analyser-fonds-investissement
[2] – https://www.bdlcm.com/articles/comment-choisir-les-meilleurs-fonds-pea-pour-votre-portefeuille
[3] – https://www.vaneck.com/fr/fr/investir-pour-les-debutants/
[4] – https://www.homunity.com/fr/blog/investissement/guide-complet-sur-les-fonds-dinvestissement-avantages-et-fonctionnement
[5] – https://www.tudigo.co/media/analyses/fonds-investissement
[6] – https://www.homunity.com/fr/blog/investissement/guide-2024-les-premiers-investissements-pour-les-debutants-conseils-et-erreurs-a-eviter
[7] – https://www.bdlcm.com/articles/fonds-pea-guide-pour-les-debutants-en-investissement
[8] – https://blog.remitly.com/fr/lafinance/dinvestissement-debutants/