People create or participate in funds for diverse reasons. Our focus in this article is on those who want to invest and the options that are open to them. We have written a separate article about entrepreneurs who want to set up a fund to support their new business or project over here.
A family might set up an education fund for their children’s education. A couple might establish or participate in an established retirement fund so that they receive income on their retirement. People can choose to establish funds themselves or invest into existing managed funds.
A person might invest money into a mutual fund, also known as a managed fund, managed by fund managers. A benefit of such funds is that investors can access a wider range of investments that they would be able to if investing as an individual. These can be passive, meaning they follow the market automatically, for example following the S&P or NZX Top 50 companies. Active managed funds, as the name suggests, involve a manager actively watching the market to identify opportunities for better returns and taking the opportunities. There is typically higher risk and higher fees attached to active manged funds.
Investors seeking low-risk investment might choose to invest in government bond funds. The investment supports government speeding and obligations. The flip side of low-risk is also typically lower yield on the investment.
Other investors (often high-net-worth individuals) might choose to invest in hedge funds. These aim to maximise returns, but also expose investors to greater risk by using strategies such as derivates and short selling.
Many investment funds invest in publicly listed assets; private equity is the term applied when investors’ money is pooled together and invested into private companies. Private equity investors often involve more than just funding. Some private equity funds purchase stakes in private companies so that the investors effectively become partners with the private company owners with a view to maximising its success.
An increasingly popular type of investment fund are those offering investors more than a purely financial return. Impact investment funds use investor funds to support endeavours with social and environmental purposes. Investors receive a financial return as well as knowing they have contributed to other important societal causes. Find out more about impacting investing.
What do you need to know before investing in or founding a fund?
There is no one-size-fits all when it comes to funds, with different options providing advantages and disadvantages. Whether you are considering investing in or founding a fund, consider the following questions first to help choose the approach that best suits your circumstances:
- What is the purpose of the fund?
- How many people will be involved?
- Do you want to manage the funds or have someone manage them for you?
- What type of return do you want; purely financial, or financial + social?
- Do you want to derive income or capital gains from the fund?
- When and how often do you want to access any returns from the fund?
- What is your risk appetite?
When creating a fund, the founder may want to ensure that the purpose it is being set up for is recognised and continues. We sometimes work to ensure this by setting up special share types or setting up “Kaitiaki” entities to hold some of the ownership and be involved in key decisions. We describe this in more detail in this paper on Steward Ownership.
We have helped many people who have questions about funds and are happy to discuss further. Feel free to contact us on 03 348 8480 or by email to Steven Moe – firstname.lastname@example.org or Kris Morrison – email@example.com Please note that this is not a substitute for legal advice.