Investment funds are a lot like a meal of investments put together by an expert chef. When you buy into an investment fund, you're pooling your money with that of a lot of other investors to buy shares of a "meal" of investments selected by the "chef" - a professional investment manager - rather than each of you selecting items off the menu. An investment fund can hold many different types of investments - stocks, bonds, money market funds - or all of these.
For example, let's say you wanted to do something really special for your sweetheart's birthday, and Wolfgang Puck just happened to be in town. Because he's one of the world's most famous chefs,
he doesn't come cheap, so you collect a bunch of money from your friends and relatives to pay for a catered dinner party for everyone.
Two types of investment funds are mutual funds and institutional funds. Both are available under the FRS Investment Plan. Your fees and rights are different under the two types of funds.
Each mutual fund is actually a company. Its operation and fees are governed by a legal document known as a prospectus, which is approved and can be changed by the company's board of directors.
Although about 90 million people in the U.S. own parts of mutual funds, these type of funds hold only about 20% of all money invested in retirement plans (including IRAs).
Some mutual funds are "marketed," or distributed, by other companies or brokers, which can add additional costs.
While mutual funds are regulated by the federal government, they can actually take on lots of investment risk when they try to "beat the market."
"Institutions" (the sponsors of retirement plans) arrange these "wholesale" funds for the benefit of their members. Wealthy individuals also often use institutional funds. In total, about 80% of all retirement plan investments are in institutional funds.
You may be surprised to learn that institutional funds are run by the same companies that help run mutual funds. Banks, insurance companies, brokers and mutual fund advisory companies all offer institutional funds.
Costs are very low because there are no additional distribution fees and because the retirement plan can use its bargaining power to get the best deals.
Unlike with mutual funds, retirement plan sponsors can set out how much risk an institutional fund can take in trying to beat the market. Institutional funds are also held to the highest standards of expertise and conduct in investing your money.