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What is an Investment Fund? A Simple Explanation for Kids, Teens and Beginners

Part 1: What is an Investment Fund, types of funds, what they invest in, advantages of investing in a fund

Part 2: What type of Investment Fund should you invest in, fund fees and charges, how to invest in funds

Introduction to Investment Fund for Kids and Teens

This video explains the concept of investment funds in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about funds, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.

What is an Investment Fund - A Simple Explanation for Kids Teens and Beginners
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Suitable for students from grade levels:

  • Kindergarten
  • Elementary School
  • Middle School
  • High School

The topics covered are:

What is a fund?

Investment Funds for Kids Teens and Beginners
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A fund is a pool of money that is collected from many investors for a specific type of investment – like buying stocks, bonds, real-estate or a combination of different asset classes.

The investors don’t own the assets directly but get a part of the fund – called a unit – in proportion to their contribution.

As the value of the investments made by the fund goes up or down, so does the value of each of the fund units. 

What are the types of funds?

The main types of funds are Mutual Funds, Index Funds, Exchange Traded Funds, or ETFs, and hedge funds.

Mutual funds are usually managed actively by a portfolio manager who tries to beat the market.

Index funds are passively managed funds that track a certain index, and buy and sell stocks based on the changes in that stock index.

Exchange traded funds, as the name suggests, trade on a stock exchange and are usually passively managed.

Hedge funds are high risk high reward funds actively managed by hedge fund managers and require a lot of money to invest in.

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What does a fund invest in?

A fund invests based on its stated purpose.

Investment Funds - Investing in Stocks Bonds Real Estate and Other Asset Classes
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A fund’s purpose could be to invest in specific asset classes. For example, equity funds invest in stocks, fixed income funds invest in corporate or government bonds, and balanced funds invest in both stocks and bonds.

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A fund could also offer its investors a specific type of return. For instance, growth funds focus on capital appreciation over time and invest in stocks that have a high potential of growth. On the other hand, value funds invest in undervalued stocks that pay high dividends, offering investors a steady stream of income.

Funds could also be sector specific, like Tech funds that only invest in technology companies, or health care funds that only invest in companies in the health care industry. 

Why would I want to invest in a fund? What are the advantages?

Investment Funds - Advantages - Diversification
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One of the main benefits of using a fund to invest instead of investing in individual securities is diversification.

Let’s say you want to invest in large-cap companies. If you invested on your own, you might be able to invest in just a handful of companies. But that would not be a diversified portfolio. If instead, you used an index fund that tracks the S&P 500, you would get a slice of the top 500 large cap companies. This way, your portfolio would be well diversified.

Another huge benefit is that you only need a small amount of money to get started as many funds don’t have a minimum investment requirement.

For example, if you invested in a fund that tracks the NASDAQ composite index, you could get access to thousands of technology stocks for less than $100. But if you wanted to buy even one share of a tech company like Amazon, you would need a few thousand dollars!

Another benefit of investing in funds is that you don’t need any expertise in analyzing stocks. The fund managers are the experts who do that for you.

What type of fund should I invest in? Index Funds, ETFs, or Mutual Funds?

Type of Funds for Investing - Index Funds ETF or Mutual Funds MF
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Generally, actively managed mutual funds should be avoided because of their high expense ratios and no guarantee of beating the market.

So you can choose between the passively managed optionsIndex Funds and Exchange Traded Funds or ETFs.

If you want to invest in the broad market, you could invest in an index fund or an ETF that tracks the S&P 500. But, if you want to invest in a certain sector, you could either put your money in an ETF that invests in that sector, or in an index fund that tracks an index related to that sector.

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For example, if you wanted to invest in the tech industry, you could invest in an Index Fund tracking the NASDAQ composite, or in an ETF that invests in tech stocks.

What costs should I keep in mind when investing in funds?

The most important cost to consider when investing in funds is their expense ratio. Expense ratio indicates the operating cost of the fund, and includes investment management fee, advertising expenses, legal fees, etc.

In addition to the expense ratio, you also need to keep in mind other fees like entry and exit loads, brokerage fees and commissions, etc. All these costs could significantly lower your investment returns. 

How can I invest in funds?

How to Invest in Funds - Costs Charges and Fees
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Most funds can be bought directly from fund companies or through an authorized broker.

Buy and sell orders for Mutual funds, placed any time during the day, are processed only after the market closes at the day’s Net Asset Value or NAV.

It is the same for Index Funds. 

ETFs, on the other hand, are bought through a brokerage account. Their price fluctuates throughout the day, and they can be traded any time during the day at their prevailing market price – just like stocks!

Which is better, investing in funds or individual stocks?

That’s a great question Sooper Cooper. We cover that in “Direct investment in stocks vs. Mutual funds”.

Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids & Teens

Part 1: What is an Investment Fund, types of funds, what they invest in, advantages of investing in a fund

Part 2: What type of Investment Fund should you invest in, fund fees and charges, how to invest in funds

What is a Fund Part 1
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