An investment fund is a pool of assets of several investors sharing the same goals, which is managed by an asset management company. Specific funds are managed by fund managers hired for this purpose.
If you wish to invest your money in a fund, you have to buy fund units. Every unit represents a small model of the investment portfolio of the entire fund. For example, if the fund invests 5% of its assets in Baltika shares, then the holder of a one-hundred euro fund unit holds 5 euros worth of Baltika shares.
The net asset value of the investment fund is calculated every business day – the assets belonging to the fund (shares, bonds, deposits, etc.) are valued and the obligations of the fund are deducted. Division of the net asset value of the fund with the number of units gives the net asset value of the unit, which is usually referred to with the abbreviation NAV.
The foundation to the popularity of funds was laid by Harry Markowitz (born in 1927) with his portfolio theory as he proved that dispersion of a portfolio allows investment risks to be reduced considerably without the rate of return suffering in the long run. Funds operating according to today’s principles were first created in the US in the 1920s.