How investment funds work
Investing can feel like stepping into a world full of jargon, charts and uncertainty. If you’re new to it, the idea of picking individual stocks or trying to “beat the market” can be overwhelming. That’s exactly why investment funds exist.
Investment funds are one of the most popular ways for beginners in Ireland to start investing. They give you access to a wide range of investments, professional management and built-in diversification, all without needing expert-level knowledge yourself. If you’re just getting started, they can be a practical stepping stone towards building long-term wealth.
If you’d like a broader introduction first, our article on how to begin investing and our Investing 101 beginner’s guide are great places to start. For now, let’s break down investment funds into simple terms.
What is an investment fund?
An investment fund is a pool of money collected from many investors, which is then invested on their behalf by professional fund managers.
Instead of buying individual shares or assets yourself, you’re buying units (or shares) in the fund. The fund manager uses the combined money to invest in a mix of assets, such as:
- Company shares (stocks)
- Bonds (loans to governments or companies)
- Property
- Cash or cash equivalents
Think of it like carpooling. Instead of driving alone and covering the full cost, you share the journey, and the costs, with others. In return, you gain access to opportunities that might be difficult or expensive to reach on your own.
Here’s why funds appeal to beginner investors:
- Professional management
Fund managers research markets, analyse opportunities, and make investment decisions for you. This saves you from having to constantly monitor financial news or pick individual stocks.
- Instant diversification
Diversification simply means spreading your money across different investments to reduce risk. A single fund might hold hundreds or even thousands of assets. That way, if one investment performs poorly, others can help to balance things out.
- Accessibility
Some investments require large sums of money to access individually. Funds allow you to invest smaller amounts while still gaining exposure to those opportunities.
- Convenience
Funds simplify the process. Instead of managing dozens of individual investments, you manage just one.
In short, investment funds make investing simpler, especially if you don’t have the time, expertise or interest to manage everything yourself.
What are the different types of investment funds?
There’s no one-size-fits-all investment fund. Different funds have different strategies, risks and goals. Understanding the main types can help you choose what suits your financial situation best.
Mutual Funds
Mutual funds are one of the most traditional types of investment funds. They pool money from investors and use it to invest in a diversified portfolio of assets.
These funds are actively managed, meaning a professional fund manager decides what to buy and sell in an attempt to outperform the market.
Key features of mutual funds:
- Actively managed by professionals
- Typically priced once per day, meaning less volatility
- Designed to outperform a specific market or benchmark
- Often higher fees due to active management.
Mutual funds can suit investors who prefer not to call all the shots themselves and want professional expertise guiding their investments.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds, or ETFs, have grown hugely in popularity over the past decade, and for good reason.
Like mutual funds, ETFs pool money and invest in a basket of assets. But unlike mutual funds, ETFs trade on stock exchanges throughout the day, just like individual shares.
Key features of ETFs:
- Bought and sold during market hours
- Typically lower fees than mutual funds
- Often track an index (like the S&P 500 or the MSCI World Index)
- Highly transparent.
ETFs are popular with beginner and experienced investors alike because they combine diversification with flexibility and low costs.
Index Funds
Index funds are a specific type of fund designed to track the performance of a market index. For example, they might track:
- The S&P 500
- The FTSE 100
- Global stock market indices.
Rather than trying to beat the market, index funds aim to match it.
Key benefits include:
- Lower management fees
- Consistent, long-term performance
- Simple investment strategy.
Because they don’t rely on active decision-making, index funds tend to have lower costs. Over time, those lower costs can make a significant difference to your returns.
Many long-term investors use index funds as the foundation of their investment portfolios.
Hedge Funds
Hedge funds are more complex and typically aimed at experienced or high-net-worth investors.
They use advanced strategies, such as:
- Borrowing money to increase investments
- Using derivatives
- Betting on falling prices as well as rising ones.
Hedge funds aim for higher returns, but they also come with higher risk and fees. They’re generally not suitable for beginners.
Other common fund types worth knowing
While the above are the most well-known, you may also encounter:
- Pension funds: Used to invest your retirement savings. If you have a pension in Ireland, your money is likely already invested in funds.
- Property funds: Invest in commercial or residential property.
- Balanced funds: Combine shares, bonds and other assets to balance growth and risk.
Each type serves a different purpose depending on your goals, timeline and tolerance for risk.
How do investment funds work?
Once you invest in a fund, several things happen behind the scenes.
- Your money is pooled with other investors’ money
When you invest, you purchase units in the fund. The value of these units rises and falls depending on the performance of the underlying investments.
- A fund manager makes investment decisions
Professional managers decide which assets to buy, hold or sell. Their goal depends on the fund’s strategy. Some aim for growth, while others focus on income or stability.
- Your investment grows (or falls) with the fund’s performance
If the investments in the fund increase in value, the value of your units increases too. If they fall, the value of your investment decreases.
- You can receive returns in two ways
Returns typically come from:
- Capital growth: when the value of your units increases
- Income: such as dividends or interest paid by the investments.
These returns can either be paid out to you or reinvested to help your investment grow further.
- Fees are charged for management
All funds charge fees, usually expressed as a percentage of your investment. These fees cover management, administration and operating costs.
While fees are important, they shouldn’t be the only factor in your decision. The right fund for you depends on your personal goals, timeline and comfort with risk.
Why investment funds are a great starting point
For many beginner investors, funds offer the perfect balance of simplicity and effectiveness.
They allow you to:
- Start investing without expert knowledge
- Spread risk across multiple assets
- Access professional management
- Invest gradually over time.
Most importantly, they help you get started. And when it comes to investing, starting early, even with small amounts, can make a huge difference over time thanks to compound growth.
If you’re unsure which funds are right for you, getting expert guidance can make the process much easier. At askpaul, we help people across Ireland build investment strategies tailored to their goals, risk level and timeline. You can learn more about our investment consultation services here.
Investing doesn’t have to be complicated. With the right approach, and the right support, you can build confidence and take meaningful steps towards your financial future.
Sources:
This article is for general information purposes and is not an invitation to deal or address your specific requirements. Any expressions of opinions are subject to change without notice. The information disclosed should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information of the various source material, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
