What are investment funds, their types and objectives?

An investment fund is a collective investment scheme aimed at providing investors therein with an opportunity to participate collectively in the profit of the scheme, which is managed by a fund manager for specified fees.

An investment fund is known as an investment vehicle that puts investors’ savings in the hands of investment managers who scan the market for the best opportunities. This is to generate profit and give individual investors access to markets that they would otherwise have a hard time investing in independently given the limited resources available.

An investment fund includes a group of securities that are selected based on specific foundations and criteria that achieve the fund's investment goals. This is in addition to tapping the diversification benefit for fund investors, which helps lower the overall risk level of investment.

Fund investments are usually not subject to restrictions that apply to individual investments. Accordingly, diversification will be more feasible and costs of selling and buying securities will be reduced.

Funds often generate capital gains. This includes profits resulting from a change or a rally in the prices of the invested securities, in addition to dividend gains. However, the fund may incur losses in case of a decline in the price of the asset securities.

Types of funds:

According to the Capital Market Authority (CMA), and in terms of offering, there are three types of funds:

Public Fund: an investment fund which is established in Saudi Arabia and its units may be offered to investors in the Kingdom in any way other than a private placement.

Private Fund: a non-public investment fund which is established in Saudi Arabia and its units may be offered by a private placement to investors in the Kingdom.

Foreign Fund: an investment fund, which is established in a jurisdiction outside Saudi Arabia and its units may be offered by a private placement to investors in Saudi Arabia.

There are two types of public and private investment funds:

According to the CMA’s regulations, and in terms of the nature of the fund, there are two types of public and private investment funds:

Open-Ended Investment Fund: An investment fund with changing capital, the units of which would increase with the issuance of new units and decrease with redemption by unitholders of some or all of their units. Unitholders are entitled to redeem the value of their units at their net asset value on dealing days set in the fund’s terms and conditions (T&Cs), in accordance with the Investment Funds Regulations.

Open-ended investment funds include equity funds, money market funds and debt instruments funds.

Closed-Ended Investment Fund: It is any non-open-ended investment fund. Rather, it is often capital-specific, and units are only allowed to be recovered at the end of the fund’s term disclosed in its T&Cs or when the units are sold to other investors.

Closed-ended investment funds may increase their capital by inviting participation in the fund if conditions and provisions permit. Such funds may or may not be traded.

Closed-ended investment funds include the real estate investment trust (REIT) funds and capital-protected funds.

Funds can also be classified by type of assets in investment portfolios:

Equity Fund invests mainly in listed companies’ stocks.

Debt Instruments Fund invests in debt instruments such as Sukuk and bonds issued by companies, government and semi-government entities or any other entity that can issue debt instruments.

Money Market Fund invests in short-term securities and money market deals. It is characterized with high-liquidity, short-term maturity and low-risk rates compared to other funds.

Commodity Fund invests in a certain commodity such as gold and silver.

REIT Fund is a publicly-traded fund, aimed at investing in developed properties to generate returns. The fund’s net profits are distributed in cash to unitholders of record during its active period, on an annual basis, at a minimum.

Multi-Asset Fund invests in several types of assets, such as stocks, debt instruments, money market deals and other investment funds.

Holding Fund is set up under the responsibility of a managing authority under one or more programs, to implement one or more specific funds.

Balanced Fund combines between equities and debt instruments in its assets and devotes part of its investments to short-term financial instruments.

Exchange-Traded Fund (ETF) is a type of a pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.

Feeder Fund is a fund that invests all its assets in another investment fund.

Closed-Ended Real Estate Investment Fund is a collective real estate investment scheme, aimed at providing investors with an opportunity to participate collectively in the scheme profits. Its objectives include the initial development then selling; construction development then selling; initial or constructional development to leasing for a specified period then selling and ownership of properties to lease for a specified period then selling.

Index Fund is an investment fund that tracks the performance of a specific market index.

Objectives of investment funds:

Income Fund aims primarily to invest in assets with a distinguished track record of dividend distributions.

Growth Fund invests in assets with a great potential, as the fund mainly depends on capital gains.

Balanced Fund which achieves objectives by developing capital and generate income.