A fund is basically a basket of shares or bonds that have something in common, and where someone decides what it contains. You can own a small part of this basket.
When buy a part of a fund, we can get several benefits compared to picking by ourselves a share or a bond, as for example the possibility of hiring professional investment managers, which may potentially be able to offer better asset allocation and more adequate risk management, get lower transaction costs, and increase the asset diversification to reduce some unsystematic risk.
The selection process is also much more simple than if we try to pick a share or a bond. We choose a part of a fund based on its goals, risks, fees and other factors. The manager of the fund and his team of financial analysts oversees the fund and decides which shares or bonds it should hold, in what quantities and when the shares and bonds should be bought and sold, based on the fund scope. Marketers are then responsible to promote this fund and sell it to customers directly or though financial institutions like banks.
There are several variables that allow to classify funds, but one of the more important one is if it is an indexed fund. If it is, is broad-based and tracks a specific index, for example the S&P 500. If it isn't, is tightly focused, for example a fund that invests only in small technology shares.
Now that we know what a fund is, we can move on and learn how to select a fund for our #imap journey.
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