Complete Guide to Fund Investment: Practical Experience from Beginner to Expert

As one of the most popular investment tools in the capital markets, funds attract millions of investors to participate. This article will start from the essence of funds, deeply analyze their classification, advantages and disadvantages, purchasing channels, and finally share core practical insights to help investors avoid common investment pitfalls.

What exactly is a fund?

A fund (Fund), in a broad sense, is a sum of capital pooled for a specific purpose. In the capital market, when we refer to funds, we usually mean securities investment funds.

Its core operating principle is: based on the principles of profit sharing and risk sharing, fund management companies pool the diversified funds of ordinary investors and entrust professional fund managers to manage and operate them uniformly, aiming to achieve returns that surpass individual investments. This collective management model allows ordinary investors to access investment fields that previously required large amounts of capital.

How are funds classified? Master the four dimensions

By investment target

Funds can be divided into equity funds (mainly investing in stocks), bond funds (mainly investing in bonds), money market funds (investing in short-term financial instruments), and hybrid funds (multi-asset portfolios). Investors should choose the appropriate type based on their risk tolerance.

By organizational form

Corporate funds are established by issuing fund shares and forming an investment company; contractual funds are formed through agreements among the fund manager, custodian, and investors. There are differences in legal nature and operation methods between the two.

By trading mechanism

Closed-end funds have a fixed number of units, do not accept new subscriptions after issuance, and cannot be redeemed early. Open-end funds, on the other hand, allow investors to subscribe and redeem freely, offering higher flexibility. Most individual investors are exposed to open-end funds.

By risk-return level

Growth funds pursue high returns but come with high risk; balanced funds seek a balance between return and risk; income funds focus on stable cash flow with the lowest risk.

What are the core advantages of investing in funds?

Low investment threshold and convenient asset allocation

For individuals engaging in international investments and cross-border asset allocation, it requires extensive research, opening multiple accounts, and comparing various fees. Through funds, all these preparations are handled by professional teams, allowing investors to access global markets with one click. Fund products cover stocks, bonds, commodities, and more across different regions, offering broad choices.

Cost averaging and effective risk diversification

Funds support regular fixed-amount investments, enabling investors to avoid large lump-sum investments, enter the market gradually, and average their investment costs. Additionally, since funds hold multiple assets internally, the impact of fluctuations in a single asset on overall returns is limited, effectively reducing concentration risk.

Professional management and timing the market

Many retail investors lack professional knowledge, cannot monitor the market long-term, and easily miss investment opportunities. Fund managers, with their deep expertise and rich practical experience, can more accurately assess the market and provide steady operational support during the investment process.

Potential risks of fund investment

Complex fee structure

Besides traditional stamp duty, transfer fees, and transaction costs, fund investors also need to pay fund management fees, custodian fees, account management fees, and more. The fee rates vary significantly among different funds, so investors should compare carefully.

Limited investment freedom

Delegating decision-making to fund managers means investors can only decide when to subscribe and redeem, with no control over specific holdings. This may be restrictive for investors accustomed to active trading.

Returns may fall below expectations

Funds adopt diversified and prudent investment strategies, focusing on long-term stability of returns. If investors have sharp insights and accurate timing, selecting individual stocks themselves might yield higher returns than funds.

Difficulty in selecting managers

Excellent fund managers are key to fund performance, but identifying their professionalism, experience, and investment philosophy is not easy. Investors need to conduct in-depth research.

Where to buy funds? Three main channels

Bank channels

Banks are traditional fund sales channels, with advantages of high credibility and comprehensive customer service. However, subscription fees are higher, the number of available funds is limited, and information may be less transparent.

Direct sales from fund companies

Investors can purchase directly through the fund company’s official website, often with more favorable fees. The downside is that they can only buy funds issued by that company, limiting options.

Third-party platforms

Professional fund sales platforms gather a large variety of funds, providing detailed disclosures, research analysis, and low subscription fees. Investors can complete cross-company and cross-type fund allocations on a single platform.

How to select and allocate funds?

Build a core fund portfolio

The core allocation should constitute 60%-80% of the total fund portfolio, as it largely determines the final investment outcome. The core should include funds with steady performance and distinctive features, such as those focusing on emerging industries or service sectors.

Complement with 10%-20% flexible allocation, possibly increasing high-risk, high-return funds to balance the conservative core.

Balance the number of funds

Having too few funds can increase volatility and reduce effective risk diversification; too many can complicate management and diminish diversification benefits. Generally, individual investors should hold 5-10 funds.

Five key considerations for fund selection

First, consider the fund type, ensuring it matches your investment horizon and goals. Second, review historical performance; while past performance does not guarantee future results, funds ranked in the top third within their category merit attention.

Third, understand the fund manager deeply; studies show about 30% of fund returns are attributable to the manager’s ability. Choose experienced, stable managers.

Fourth, evaluate the fund company’s overall strength, including governance, risk control, and incentive mechanisms. Lastly, consider fund size; small funds are more flexible, large funds tend to operate more stably.

Practical tips: five golden rules of investing

Rule 1: Prioritize knowledge accumulation

Blind investing is a common mistake among retail investors. Before making any investment decision, engage in systematic learning, establish a sound investment philosophy, and cultivate a calm mindset. “Learn more, observe more, think more” can effectively reduce losses.

Rule 2: Set reasonable take-profit points

Many beginners believe funds should be held indefinitely. In reality, fund prices fluctuate cyclically. The ideal approach is to set take-profit targets based on market conditions. When the target is reached, take profits promptly. The mindset of “earning a little is better than losing” often leads to more stable returns.

Rule 3: Focus on quality over quantity

Success in investing depends on accurately selecting promising funds, not on holding many. Chasing numerous underperforming funds will not increase income and may add management burden and risk exposure.

Rule 4: Maintain liquidity

Investors should reserve some liquid funds to handle emergencies. Before investing, understand the withdrawal restrictions of different funds, such as redemption limits for money market funds and redemption periods for stock funds.

Rule 5: Avoid chasing gains and selling in panic

A common mistake among beginners is increasing holdings impulsively after a fund’s price rises, causing the cost basis to escalate rapidly. The rational approach is to develop an investment plan and stick to it, controlling the size of each addition to keep overall costs within manageable limits.

Mastering these fund investment insights, combined with scientific asset allocation methods, enables ordinary investors to achieve wealth growth through fund investments.