Investing Assets & Markets What Is a Fund? Savings and Investment Funds Explained By Robin Hartill Robin Hartill Robin Hartill is a Certified Financial Planner (CFP) who writes about money management, investing, and retirement planning. She has written and edited personal finance content since 2016. Robin currently leads The Penny Hoarder's personal finance advice column, "Dear Penny." Through this platform, Robin answers the questions of readers from across the United States. She decodes industry jargon, making complicated finance topics like paying taxes, managing a portfolio, and boosting a credit score easy to understand. learn about our editorial policies Updated on January 20, 2022 Reviewed by Thomas J. Brock Reviewed by Thomas J. Brock Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities. learn about our financial review board Fact checked by Heather van der Hoop Fact checked by Heather van der Hoop Website Heather van der Hoop (she/her) has been editing since 2010. She has edited thousands of personal finance articles on everything from what happens to debt when you die to the intricacies of down-payment assistance programs. Her work has appeared on The Penny Hoarder, NerdWallet, and more. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Definition and Examples of a Fund How a Fund Works Types of Investment Funds Definition A fund is a pool of money you save or invest for a specific purpose. Some types of funds pool money from many different investors under the direction of a professional manager. Photo: PixelsEffect / Getty Images A fund is a pool of money you save or invest for a specific purpose. Some types of funds pool money from many different investors under the direction of a professional manager. But a fund can also be a sum of money you set aside and manage on your own. There are many varieties of funds out there, so it’s easy to get confused. We’ll explain some of the most common types of funds, how they work, and how they may impact individual investors. Find out what funds you need to achieve your money goals. Definition and Examples of a Fund A fund is a pool of money individuals, businesses, investment companies, or governments create for a designated purpose. Funds are common in daily life, and you may have established or contributed to a fund without even knowing it. Funds can be used for many different purposes. Let’s say a couple is preparing to have a child. When getting ready for parenthood, they may decide to start putting away and saving money for that child’s higher education. In this case, the soon-to-be parents are creating a fund to be used if and when their child is ready to go to college. How a Fund Works No matter what you are allocating money for, pooling money in a fund is one way to reach a goal or achieve a designated purpose. Below, find some common types of funds you may have or want to create as an individual: Emergency fund: If you’ve set money aside in a separate bank account in case of an unexpected expense, you’ve established an emergency fund for yourself. Financial planners typically recommend having an emergency fund that can cover three to six months’ worth of expenses. Retirement fund: If you have a 401(k) or a similar employer-sponsored account, or you’ve set up an individual retirement account (IRA), you have a retirement fund. These accounts offer important tax advantages, although you’ll typically have to wait until you’re at least age 59 ½ to withdraw your money and avoid penalties. Education fund: Many parents start an education fund to pay for their child’s higher education. A popular option for doing so is a 529 plan, which comes in two forms: education savings accounts and prepaid tuition plans. Trust fund: A trust fund is an estate-planning tool in which a third party, known as the trustee, manages assets within the trust on behalf of a beneficiary. Trust funds are often used to avoid probate and in some cases, reduce estate taxes. Some people use trusts to control the distribution of their assets after they die, too. Types of Investment Funds Often, the word “fund” refers specifically to investment funds. Below, learn about the most common types of funds within the investment world, all of which pool the funds of investors in hopes of seeking greater returns. Mutual Funds A mutual fund is one of the most common types of investment funds. The fund pools many investors’ money and uses the total amount to invest in a mix of securities, which provides instant portfolio diversification. Note Mutual funds are the most common type of investment options in 401(k) plans. Some mutual funds are passively managed index funds, which means they attempt to mirror the performance of a benchmark index, like the S&P 500. However, many mutual funds are actively managed, which means the fund manager tries to outperform an index by using strategies like buying low and selling high, and tax selling. To buy and sell mutual funds, you as an individual investor would go directly through an investment company. Mutual funds trade just once a day after close of market. Exchange-Traded Funds An exchange-traded fund (ETF) uses pooled investor funds to invest in a basket of securities. The key difference is that ETFs are bought and sold on stock exchanges throughout the trading day. Although most ETFs are passively managed index funds, there are some actively managed ETFs. Hedge Funds A hedge fund uses pooled funds from investors to invest in a mix of assets with the goal of receiving positive returns. In this case, though, an investment manager attempts to achieve market-beating returns, and typically receives part of the fund’s profits as a performance fee. Hedge funds are less regulated than mutual funds so investment managers have more leeway with their strategies. They are allowed to use risky strategies that are mostly off limits to mutual funds, such as margin trading and leverage, to boost their returns. Because they come with higher risks, hedge funds are only available to wealthy accredited investors. Note Hedge funds traditionally follow the two-and-twenty fee structure, meaning they charge investors up to 2% of assets under manager, plus 20% of the fund’s profits. The U.S. Securities and Exchange Commission (SEC) warns that performance fees can entice a fund manager to take on greater risk in pursuit of higher returns. Private Equity Funds A private equity fund focuses on long-term investments with its investor-pooled money—typically with time horizons of 10 years or more. A private equity fund may take a controlling stake in a company and become actively involved in management, or it may focus on investing minority stakes in startups or rapidly growing companies. Like hedge funds, private equity funds are limited to accredited investors. Key Takeaways A fund is a pool of money that’s saved or invested for a specific purpose.Common funds an individual may use or be familiar with include emergency funds, retirement funds, a trust fund, and an education fund.In the investment world, common funds include mutual funds, exchange-traded funds (ETFs), hedge funds, and private equity funds.Some investment funds, such as hedge funds and private equity funds, are limited to wealthy accredited investors. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. FINRA. "Start an Emergency Fund." Accessed Nov. 5, 2021. IRS. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Nov. 5, 2021. FINRA. "Investing in Your 401(K)." Accessed Nov. 5, 2021. Fidelity. "Understanding How Mutual Funds, ETFs, and Stocks Trade." Accessed Nov. 5, 2021. U.S. Securities and Exchange Commission. "Hedge Funds." Accessed Nov. 5, 2021. U.S. Securities and Exchange Commission. "Private Equity Funds." Accessed Nov. 5, 2021.