ETF Academy Investment Funds: An Efficient Way to Diversify Investments
Funds are the most efficient way for individuals to diversify their investments. As explained in the previous chapter, diversification is the best way to reduce risk while not necessarily giving up returns. Whether traditional mutual funds or ETFs, funds are a convenient way of pooling your investment with others to achieve valuable diversification.
Investment funds trace their origins to the Netherlands in the 18th Century. Historians credit the Dutch East India Company (VOC) with creating the first pooled fund when it asked citizens to club together to finance a sea voyage. A successful voyage would yield substantial profits; less success would lead to smaller profits or even some capital loss.
Just as the Dutch were seafaring pioneers, so the Americans have tended to lead in finance and investment over the past 100 years at least. Mutual funds, as we know them now, evolved in the U.S. in the 20th Century. The Massachusetts Investors’ Trust in Boston, launched in 1924, often is seen as the first mutual fund and still exists1. Mutual funds captured the attention of U.S. private investors in the 1980s and 1990s. They are now mainstream investments, forming the core of U.S. individual retirement accounts.
Mutual funds come in many variations:
- Equity funds, which invest in shares (or stocks)
- Bond funds, which invest in bonds
- Real estate funds, which invest in real estate
- Commodity funds, which invest in commodities such as gold, oil or coffee
- Money market funds, which typically invest in short-term debt instruments and can be an alternative for bank deposits
- Multi-asset funds, which typically invest in a combination of equities, bonds and other asset classes
Exchange Traded Funds (ETFs) are a more innovative investment vehicle and have grown rapidly in popularity over the past 10 years. They offer all the advantages of traditional mutual funds and more. We will elaborate on this in the subsequent part of the academy.