Understanding Fund Investment: A Complete Guide from Scratch

For many working professionals, wanting to manage their finances steadily while having no time to research market analysis, fund investment is a good choice. These products are managed by professional teams and carry more controllable risks compared to direct stock trading. So, what exactly are funds? How should one choose and allocate them?

The Essence and Core Advantages of Funds

Definition of Funds

A (securities investment fund) is a collective investment tool managed by a fund manager responsible for investment operations and a fund custodian responsible for asset safekeeping. Investors pool their funds, which are collectively allocated by a professional team into various assets such as stocks, bonds, and money markets, forming an investment mechanism of profit sharing and risk sharing.

Why Choose Fund Investment?

Compared to individual direct market entry, fund investment has several obvious advantages:

Diversified Asset Allocation

Funds pool capital to invest in different asset classes like stocks, bonds, and commodities, offering much broader and deeper investment opportunities than individual retail investors.

Risk Diversification Effect

Funds spread capital across multiple asset types and securities, so fluctuations in any single investment won’t cause fatal damage to the overall portfolio.

Professional Management Team

Fund managers possess deep market knowledge and data analysis skills, enabling them to make more rational and wiser investment decisions than retail investors.

Convenient Liquidity

Most funds support buying and selling at any time, allowing quick realization of funds when needed, without long-term lock-in issues.

Low Entry Threshold

The minimum investment amount is only a few thousand yuan, lowering the participation barrier for ordinary people compared to real estate, futures, and other large-scale investments.

How Do Funds Operate? What Is the Fee Structure?

Roles of the Three Main Participants

Fund operation involves three main participants:

• Investors — Hold fund shares and provide capital
• Fund Managers — Develop investment strategies and select specific investment products
• Custodian Institutions — Usually banks, responsible for asset safekeeping and supervision

Investors’ funds are first pooled by the fund manager. After forming an investment strategy, the custodian invests this capital into money market or capital market products.

What Fees Are Paid for Investing in Funds?

Throughout the entire lifecycle from subscription to redemption, investors may encounter the following fees:

These four types of fees are the most common. Subscription and redemption fees are triggered by transactions, while management and custodian fees are automatically deducted annually.

Five Main Types of Funds Explained

Based on investment targets, funds can be divided into five main types, each with different risk and return characteristics:

Money Market Funds — The Safest Choice

Focus on short-term fixed-income products like government bonds, commercial paper, and deposit certificates. They have the lowest risk, best liquidity, and are suitable for conservative investors who use funds as a “replacement for demand deposits.” The downside is limited long-term yields.

Bond Funds — Steady Returns

Primarily invest in government bonds, treasury bonds, corporate bonds, and other fixed-income instruments, earning returns through bond interest. Bond funds investing in government bonds have the lowest risk and good liquidity. They offer higher potential returns than money market funds but require patience from investors.

Stock Funds — High Risk, High Return

Mainly invest in stocks, aiming for capital appreciation. While potential returns are highest, they face stock price fluctuations, systemic risks, and management risks. Suitable for long-term investors who can tolerate short-term losses.

Index Funds — Passive Tracking Strategy

Track a specific index (such as stock indices or commodity indices). Fund managers buy all or some of the index’s constituent stocks to replicate the index’s rise and fall, striving for minimal tracking error. They have good liquidity and relatively low fees. ETFs are a common form of index funds.

Hybrid Funds — Risk-Balanced Approach

Allocate assets across stocks, bonds, and other instruments to achieve dynamic risk and return balance. Their risk level is between bond funds and stock funds, suitable for investors seeking moderate growth without excessive volatility.

Overall, funds have risks and returns that surpass leveraged products like futures and options, with investment thresholds typically around 3,000 yuan. Most funds do not contain leverage components and are suitable for steady, long-term investment strategies.

How to Build a Suitable Fund Investment Portfolio?

The core wisdom of fund investing lies in portfolio allocation. A single fund may fluctuate greatly, but different funds have varying risk and return profiles, and a scientific combination can balance each other.

Step 1: Understand Your Risk Tolerance

Before allocating funds, honestly assess:

• Whether your financial situation allows for short-term losses
• Whether you can psychologically withstand a 20%, 30%, or even 50% decline in principal
• Your investment horizon: 3 years, 5 years, or more than 10 years

Step 2: Choose Allocation Based on Risk Preference

The following three allocation schemes can serve as references, adjusted according to personal circumstances:

• Aggressive — Optimistic about long-term market prospects, able to tolerate large fluctuations, aiming for rapid asset growth
• Balanced — Seeks growth while controlling risks, aiming for steady returns
• Conservative — Prioritizes capital safety, with secondary focus on returns; suitable for retirees or risk-averse individuals

Step 3: Implement “Long-Short” Investment Rhythm

Avoid investing all funds at once; instead, deploy in phases:

• Use long-term positions in bond and money market funds as “stabilizers”
• Use medium-term systematic investment plans (SIPs) in stock or index funds
• Reserve small amounts for short-term opportunities

This approach smooths market volatility impacts and prevents missing upward trends.

Fund Purchase Channels and Process

Where Can You Buy Funds?

Main sales channels include:

• Banks — Purchase through major commercial banks’ wealth management departments
• Fund Company Websites — Direct purchase from fund companies, usually with the lowest fees
• Third-party Fund Platforms — Aggregators of products from multiple fund companies, offering a wide selection
• Securities Firms — Investors with securities accounts can purchase via securities platforms

Basic Steps for Fund Subscription

While specific procedures vary by channel, the general process is similar:

1. Open an Account — Choose a purchase channel, complete identity verification and account application
2. Select Products — Review fund prospectuses and historical performance based on personal needs and risk capacity
3. Fund Transfer — Deposit funds into the purchase channel account
4. Submit Subscription — Choose fund products, specify subscription amount or shares, and submit application
5. Confirm Transaction — Subscription is confirmed on T+1 working day, and fund shares are allocated
6. Periodic Review — Regularly check portfolio performance and adjust allocations according to market conditions

Common Mistakes and Recommendations in Fund Investment

Mistake 1: Frequent Trading for Short-term Gains

Funds are suitable for long-term investment; frequent trading incurs extra costs and can reduce returns. It’s recommended to set a minimum investment period of 3 years or more.

Mistake 2: Chasing Past Highest Returns

Past performance does not guarantee future prospects. Good selection criteria include “fund manager stability, clear investment philosophy, and reasonable fees.”

Mistake 3: Ignoring Fee Costs

Seemingly small fees can compound negatively over the long term. Choosing low-cost channels and products is crucial.

Mistake 4: Lack of Effective Portfolio Management

Blindly buying multiple funds does not equal risk diversification. A scientific allocation should be based on a thorough understanding of your financial situation and market environment.

Summary

The core value of fund investment lies in achieving professional management and risk diversification with relatively small amounts of money. By understanding fund types, building a rational portfolio, and choosing suitable purchase channels, even busy working professionals can realize steady wealth growth.

The key is knowing yourself, choosing the right tools, and exercising patience. Funds are not tools for quick wealth, but partners for long-term wealth accumulation. Start understanding funds today, and tomorrow you can begin acting.