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  Asset Allocation  
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Investing in Funds
First Principles
  Alternative Investments  



Investing in Funds: First Principles

As we have already said, whatever fund structure you invest in, ultimately, whoever is managing the fund is going to be making direct investments in (usually) stocks and bonds.

There is no magic formula: the fund manager is going to build a portfolio of direct investments and in doing so he or she is going to apply the same principles you would (or should) if you were building a portfolio yourself.

These principles are developed in great detail in other sections in this module. But for now it is enough to note the following: the higher the return offered the greater the risk the fund manager – and, by extension, investors in the fund – is going to be taking on.

Different investment categories have different risk/return profiles and in broad terms any fund manager is going to be looking at the following sort of choice:

This is a pretty simplified graph but it makes an important point. At the risk of repeating ourselves, there is no magic formula when it comes to professional fund management; fund managers are building investment portfolios and they are subject to the same risk/return principles an individual is.

This basic risk/return tradeoff is often presented to investors in the form of a choice between growth and income; so let’s look at the distinction and what it means in practical terms.

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