An investment fund is a pool of money gathered from many investors and invested as one portfolio by a professional manager. Each investor owns units or shares of the fund rather than the underlying assets directly, and shares in its gains, losses, income and costs in proportion to the amount they put in. Funds exist because pooling lets ordinary savers buy a spread of securities they could not afford or manage on their own.
"Investment fund" is the umbrella term. It covers the mutual fund, the exchange-traded fund (ETF), the closed-end fund, the unit trust, the money market fund, the hedge fund and private equity funds. Public funds sold to retail investors are tightly regulated: in the United States mostly under the Investment Company Act of 1940, and in the European Union under the UCITS Directive. Private funds for wealthy or institutional investors operate under lighter rules.
Investment fund in plain terms
Think of a group of friends who each put money into a shared kitty and ask one experienced friend to do the shopping for everyone. Instead of each person buying a single item, the kitty buys a basket of many things. Everyone owns a slice of the basket in proportion to what they contributed, and the shopper takes a small fee for the work.
If one item in the basket goes bad, it hurts less because there are many others. If the basket grows in value, every slice grows with it. That is the whole idea of a fund: shared money, one manager, a spread of holdings and a fair way of dividing the results.
How an investment fund works
A fund collects cash from investors, and the manager invests it according to a stated investment objective, such as growth, income or tracking a market index. The value of each share is worked out from the net asset value (NAV): the market value of everything the fund holds, minus its liabilities, divided by the number of shares outstanding.
Several parties are usually involved. The investment adviser or manager makes the buying and selling decisions; a fund custodian holds the assets in safekeeping, separate from the manager's own money; a fund administrator calculates the NAV and keeps the records; and in many structures a board or depositary oversees the whole arrangement on investors' behalf. Investors pay for all of this through fees, most visibly the expense ratio.
Main types of investment fund
- Open-end funds. The fund issues new shares when investors buy and cancels them when investors sell, always at NAV. Mutual funds in the US, OEICs in the UK and SICAVs in continental Europe work this way.
- Closed-end funds. The fund issues a fixed number of shares, usually through an initial public offering, which then trade on a stock exchange at whatever price buyers will pay, often above or below NAV. UK investment trusts are the best-known example.
- Exchange-traded funds. ETFs trade on an exchange throughout the day like shares, while a creation-and-redemption process run by large dealers keeps their price close to NAV.
- Unit investment trusts and unit trusts. A UIT in the US buys a fixed portfolio and holds it until a set end date; in the UK, "unit trust" means an open-end fund set up under a trust deed.
- Private funds. Hedge funds, private equity and venture capital funds accept only qualified investors, often lock money up for years and charge higher fees.
Funds are also grouped by what they buy: a bond fund, an equity fund, a balanced fund that mixes both, or a money market fund that holds short-term debt. Some pension and institutional money sits in commingled funds, which pool several clients' assets outside the public fund rules.
Regulation around the world
In the United States, the Securities and Exchange Commission (SEC) registers and oversees public funds, which are legally an investment company under the 1940 Act. They must publish a prospectus, have a board with independent members, keep assets with a qualified custodian and price shares daily.
In the EU, the UCITS Directive (first adopted in 1985, now Directive 2009/65/EC) sets common rules on diversification, liquidity and disclosure so a fund authorised in one member state can be sold across the bloc. Funds outside UCITS, including hedge and private equity funds, fall under the Alternative Investment Fund Managers Directive of 2011. In the UK the Financial Conduct Authority (FCA) supervises authorised funds; its new Consumer Composite Investments disclosure regime began applying on 6 April 2026, replacing the old key information documents over a transition to June 2027.
Scale, benefits and drawbacks
According to the Investment Company Institute, regulated funds worldwide held about $88 trillion in net assets at the end of 2025, and US mutual funds alone about $31.4 trillion. Pooled funds now form one of the largest parts of the capital market and a big share of what the industry reports as assets under management.
The main benefits are diversification, professional management, daily liquidity for open-end funds and economies of scale. The drawbacks are fees, which reduce returns year after year; the risk that an active manager trails its benchmark; taxable distributions that investors do not control; and, for funds holding hard-to-sell assets, the risk of a rush of redemptions in a crisis. Investors compare funds using documents such as the fund fact sheet and the prospectus.