Generally, what comes to mind when we hear “financial funds” is money. While this is accurate, this term perfectly describes a “pool” of money. Usually, pooling money is a way to achieve a specific financial goal that is probably capital-intensive. This is exactly what financial funds represent, they are build-ups for pursuing your financial goals.

Types of Financial Funds and Their Importance

Financial funds refer to any pool of cash to set aside a for a distinct purpose. Those can be funds by the government to finance a project, by an insurance company to pay claims to their customers, etc. Individuals can decide to keep a fund for emergencies or other purposes.

Generally, funds are invested to earn money, and its management is left in the hands of professionals. In other words, funds are professionally managed, the professionals decide the best place to invest the funds and monitor the performance of the investments.

Here are some common types of funds:

Emergency Funds

Emergency funds are your savings for unforeseen circumstances such as job loss, a major illness or prolonged illness, or a major expense.

One thing one should understand is that emergencies are most likely to occur at the most inconvenient time. A general rule for emergency funds is to keep the worth of at least your three months expenses.

Trust Funds

Trust funds are legal arrangements that entitle a person (beneficiary) to some valuable assets of another (grantor). The trust company holds the assets until a certain condition is met, then they release them to the beneficiary.

Trust funds give the beneficiaries a financial foundation to build on and can be an efficient tool to transfer wealth across the generations.

Retirement Funds

This type of funds is kept specially for the inactive years of an individual’s life. Employees contribute money to their retirement accounts with an expectation to have stable cash flow at the later stage in their lives.

College Funds

This type of fund is common in some jurisdictions and is used to finance the children’s college expenses. College funds can have tax benefits attached to them, and can provide your children with something to fall back on in case you are not financially stable in later years.

Investable Financial Funds

There are some other types of funds that relate to investments that help you grow your money, they include:

• Mutual funds. Funds from individual investors that are invested mainly into stocks and bonds. Mutual funds are actively managed.

• Money-market Funds. One of the most liquid types of mutual funds that generate money for investors through short-term securities (Treasury bills and commercial paper).

• Exchange-Traded Funds (ETFs). These are publicly traded on exchanges, and this is what makes them different from mutual funds.

• Hedge Funds. A pool of money from high-net-worth individuals or institutions for investment purposes. They use high-risk investment strategies such as derivatives, short selling, and leverage to seek high returns on investments.

Conclusion

Keeping financial funds can help you achieve your long-term and short-term goals, and in the long run, build wealth.

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.

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