What is a fund?
A fund is a pool of money allocated for a specific purpose. A fund can be created for any purpose, be it a municipal government that reserves money to build a new civic center, a college that reserves money to provide a scholarship or an insurance company that reserves money to pay customer claims.
Key points to remember
- A fund is a pool of money set aside for a specific purpose.
- These pools can often be invested and managed by professionals.
- Some common types of funds include pension funds, insurance funds, foundations and endowments.
Operation of the funds
Individuals, businesses and governments all use funds to set aside money. Individuals can create an emergency fund or a rainy day fund to pay for unexpected expenses or a trust fund to reserve money for a specific person.
Individual and institutional investors can also invest in different types of funds for the purpose of making money. Examples include mutual funds, which pool the money of many investors and invest it in a diversified portfolio of assets, and hedge funds, which invest the assets of wealthy individuals (HNWI) and institutions of a way designed to win over – returns to the market. Governments use funds, such as special revenue funds, to pay for specific public expenditures.
Types of current funds
Here are examples of funds commonly used for personal businesses:
- Emergency fund are personal savings vehicles created by individuals and used to cover periods of financial difficulty, such as job loss, prolonged illness or major expenses. The rule of thumb is to create an emergency fund containing at least three months of net income.
- College funds are generally tax-efficient savings plans set up by families to allocate funds for their children’s expenses.
- Trust Fund are legal arrangements put in place by a settlor who appoints a trustee to administer valuable assets for the benefit of a registered beneficiary for a period of time, after which all or part of the funds are returned to the beneficiary or beneficiaries.
- Retirement fund are savings vehicles used by individuals who save for retirement. Retirees receive monthly income or pensions from retirement funds.
In the area of investments, certain types of funds include:
- Mutual fund are investment funds managed by professional managers who allocate funds received from individual investors into stocks, bonds and / or other assets.
- Money market funds are highly liquid mutual funds purchased to generate interest for investors through short-term interest-bearing securities such as treasury bills and commercial paper.
- Exchange-traded funds (ETF) are similar to mutual funds but traded on public exchanges like stocks.
- Hedge funds are investment vehicles for individuals or high net worth institutions designed to increase the return on investors’ mutual funds by incorporating high-risk strategies such as short selling, derivatives and leverage.
- Government Bond Fund are aimed at investors who are looking to invest their money in low-risk investments through treasury securities, such as treasury bills, or loans issued by agencies, such as securities issued by Fannie Mae. Both alternatives are supported by the United States government.
The government also creates funds which are allocated for various reasons. Some government funds include:
- Debt service fund are used to repay government debt.
- Capital Projects Fund the resources are used to finance a country’s investment projects, such as the purchase, construction or renovation of equipment, structures and other fixed assets.
- Permanent funds are investments and other resources that the government is not allowed to collect or spend. However, the government normally has the right to spend the income generated by these investments in the appropriate functions of government.