An investment fund works in principle in the same way, with the significant difference that the initiative to create such a “common pot” does not emanate from a group of investors, but from a financial institution. This financial institution sets up an “investment fund” (also known as a mutual fund) and then starts searching for investors who might be interested in participating in the fund by paying money into it. An investment fund is therefore nothing other than an “undertaking for collective investment” (UCI). This term may sound somewhat cumbersome, but it expresses quite well what we are talking about.
Let’s see how this works in practice:
Imagine a financial institution that has a team of employees who monitor the Japanese equity market very closely and who know this market particularly well. Instead of restricting itself to exclusively using this expertise for buying Japanese stocks for its own account, the financial institution can decide to exploit this expert knowledge further by setting up an investment fund.
This investment fund commits to pursuing a specific investment strategy, in our case: to invest exclusively in Japanese equities. Any investor interested in investing in Japanese equities can put money into this fund. In return he will receive shares or units in the fund representing his payment. The money collected by the fund is managed by its team of experts who buy and sell Japanese shares on behalf of the fund and manage the portfolio of shares acquired. If the fund makes a profit, this is either reinvested into the fund or paid out to the participating investors in the form of dividends. Finally, the fund buys back its own shares or units from investors who wish to withdraw their savings and exit the fund.
