What is a fund? A guide for fund investors to understand the profit logic and asset allocation strategies

For busy professionals or those lacking time for investment research but with financial management needs, funds are a good choice. This guide will delve into what funds are, their profit mechanisms, cost structures, and how to build a scientific investment portfolio based on your own situation.

What are Funds?

Funds (also known as securities investment funds) are a form of collective investment. Banks or brokerages issue fund shares to pool the capital of numerous investors, entrusting professional fund managers to handle investment management, while the fund custodian is responsible for safeguarding the funds. This is an indirect securities investment model of risk sharing and profit sharing.

Depending on the investment targets, funds can be mainly divided into five categories: Money Market Funds, Bond Funds, Index Funds, Hybrid Funds, and Equity Funds.

How Do Funds Help Investors Make Money? Investment Process Analysis

Step 1: Understand how capital flows

The operation of funds involves three main participants:

• Investors (fund shareholders): provide initial capital
• Fund Managers (fund management companies): develop investment strategies and allocate assets
• Banking Institutions (fund custodians): responsible for fund custody and supervision

Investors’ funds, after investment decisions made by fund managers, are invested by custodians into the money or capital markets, ultimately generating returns.

Step 2: Choose the appropriate fund type

Different fund types suit investors with different risk tolerances:

Money Market Funds

• Investment targets: government bonds, commercial paper, certificates of deposit, and other short-term fixed income products
• Features: lowest risk, good liquidity
• Suitable for: conservative investors with high requirements for liquidity and safety
• Drawbacks: relatively low long-term yields

Bond Funds

• Investment targets: government bonds, treasury bonds, corporate bonds, and other fixed income instruments
• Features: fixed income type, moderate risk and return
• Special tip: bond funds investing in government bonds have lower risk and better liquidity
• Drawbacks: require longer investment periods to achieve substantial returns

Equity Funds

• Investment targets: preferred stocks and common stocks
• Features: higher risk but greater return potential
• Suitable for: investors with some risk tolerance
• Risk types: systemic risk, unsystematic risk, and management operation risk

Index Funds

• Investment targets: all or part of the constituent stocks of a specific index
• Operation mode: passive tracking of the target index, minimizing tracking error
• Common form: ETF funds
• Features: good liquidity
• Drawbacks: affected by index fluctuations, presence of tracking error

Hybrid Funds

• Investment targets: a mix of stocks, bonds, and other assets
• Features: moderate risk and return, diversified investment characteristics
• Suitable for: conservative investors seeking a balance of risk and return

Comparison Table of Fund Types

Compared to financial instruments like stocks and futures, funds feature relatively lower risk and lower investment thresholds (often starting at 3000 yuan). Funds are suitable for long-term investors, most without leverage.

Step 3: Build a balanced investment portfolio

“Don’t put all your eggs in one basket”—this is the core principle of fund investing. Based on your financial situation and risk tolerance, scientifically allocating different types of funds can achieve the optimal balance of risk and return.

Fund Allocation Schemes Based on Risk Preference

Step 4: Fund Subscription and Starting Investment

Investors can subscribe to funds through banks, brokerages, fund companies, and other channels. The general process is: search and select target funds → understand investment rules → open an account → confirm subscription → wait for transaction completion → review periodically.

Detailed Explanation of Fund Investment Costs

Investing in funds from subscription to redemption incurs various fees. Understanding these costs helps investors make more informed decisions.

Common Fund Fees

Details of Each Fee

Subscription Fee: When investing in a fund, investors pay a certain percentage of the amount. Bond funds typically charge 1.5%, stock funds 3%. Different channels may offer discounts.

Redemption Fee and Trust Management Fee: Most Taiwan funds do not require redemption fees. However, bank-purchased funds may involve trust management fees, which are charges by banks as third-party custodians. Other channels like fund companies usually do not have this fee.

Management Fee: The fee charged by fund companies for managing assets, usually between 1% and 2.5%. Index funds, especially ETFs, tend to have lower management fees.

Custodian Fee: Fees charged by banks or custodians for managing investor funds, typically around 0.2% per year.

Core Advantages of Fund Investment

1. Asset Allocation Diversification
Funds pool investors’ capital into stocks, bonds, commodities, and other asset classes, providing broad investment opportunities and effectively reducing over-concentration risk.

2. Risk Diversification Mechanism
By spreading funds across multiple asset types, funds significantly lower risks associated with single investments.

3. Professional Management Team
Funds are managed by experienced professionals with deep market knowledge and research capabilities, enabling smarter investment decisions to pursue optimal returns.

4. High Liquidity
Funds can usually be bought and sold at any time, allowing investors to quickly realize their investments when needed.

5. Low Investment Threshold
Most funds allow investors to purchase shares with small amounts, making wealth management accessible beyond the wealthy.

As a financial management tool, funds offer a balanced asset appreciation path with lower risk, professional management, and flexible liquidity, suitable for various investor types.