How Do Funds Make Money: A Complete Investment Guide from Beginner to Advanced

For busy professionals who want to manage their finances but lack the time to research stocks and complex investment analyses, funds are definitely a good choice. How exactly do funds make money? This article will break down the operating logic of funds, their classifications, allocation strategies, and cost structures, helping you understand this classic financial tool in the simplest way.

The Essence of Funds: How Your Money Works for You

A fund is an indirect securities investment method. Banks or brokerages issue fund shares to pool the capital of many investors, which is then managed by professional fund managers. The fund custodian is responsible for safeguarding the funds. Simply put, a fund is an investment approach that “collects everyone’s resources and is managed by experts,” featuring risk diversification and profit sharing.

How Funds Make Money: A Complete Flow Analysis

To understand how funds generate profits, you first need to grasp how capital flows within the fund’s operation. The process involves three key participants:

Investors (You) — providing initial capital

Fund Managers — deciding how to allocate the funds based on investment strategies

Custodian Bank — responsible for safekeeping the funds and ensuring security

These three form a complete cycle: your capital is pooled, fund managers make investment decisions according to set strategies, and the custodian bank invests the funds into stock markets, bond markets, or other financial instruments. The returns are then distributed to investors proportionally. This is the core mechanism of how funds earn money.

Five Major Types of Funds: Choosing the Right One for Faster Growth

Different types of funds have different investment directions, and their profit paths vary accordingly. Understanding each fund’s characteristics is the first step to successful investing:

Money Market Funds — Conservative and Stable
Primarily invest in short-term fixed-income products like government bonds, commercial paper, and bank certificates of deposit. They have the lowest risk and highest liquidity. Suitable for investors prioritizing capital safety, but long-term yields are usually low, with annual returns around 2%–4%.

Bond Funds — Steady Growth Path
Invest in government bonds, treasury bonds, and corporate bonds. They are stable but have limited growth potential. Different bond funds vary in scope; for example, government bond funds carry minimal risk, while corporate bond funds are riskier but offer higher returns.

Stock Funds — Aggressive Growth Strategy
Mainly invest in common stocks and preferred stocks. They are high-risk, high-reward products. Although short-term volatility is significant, they have good appreciation potential over the long term, especially suitable for investors with longer investment horizons.

Index Funds — Passive Tracking
Track a specific stock index (e.g., CSI 300, NASDAQ 100) by purchasing constituent stocks to replicate index performance. They offer good liquidity and low fees, making them ideal for passive investors. ETFs are a common form of index funds.

Hybrid Funds — Balanced Approach
Invest in a mix of stocks, bonds, and other assets to balance risk and return. Their risk level is between bond funds and stock funds, making them especially suitable for investors seeking growth without taking on excessive risk.

Comparison of fund types:

Building a Winning Portfolio: Don’t Put All Eggs in One Basket

Knowing how funds make money is just the first step; proper allocation is equally important. Investors with different risk tolerances should choose different fund mixes:

Aggressive Investors (can tolerate large fluctuations)
50% stocks + 25% bonds + 15% money market + 10% other funds

Aiming for higher returns, but prepared for short-term losses.

Balanced Investors (seek stable growth)
35% stocks + 40% bonds + 20% money market + 5% other funds

The most popular allocation, combining market participation with stability from bonds and cash.

Conservative Investors (prioritize capital safety)
20% stocks + 20% bonds + 60% money market

Focus on principal preservation, accepting lower returns and minimal risk, ideal for near-retirees.

Remember: your portfolio should adjust with your age and life stage. Be more aggressive when young, gradually shift to conservative as you age.

From Buying to Redeeming Funds: The Complete Investment Cycle

The final step in how funds make money is actual operation. The process of purchasing funds is usually straightforward:

Step 1: Choose an investment channel (fund company, broker, bank, or online platform)

Step 2: Select target fund, fill in basic info, and submit application

Step 3: Transfer funds as required

Step 4: Once the system confirms the transfer, your fund shares are activated

Step 5: Continuously monitor the fund’s net asset value (NAV), and buy or redeem at appropriate times

The entire process from purchase to redemption typically takes 1–3 business days. Most funds allow investors to redeem at any time, offering high liquidity.

Hidden Costs: Know Before You Profit

Investing in funds isn’t free. During purchase, holding, and redemption, you’ll pay:

Purchase Fees

• Bond funds: about 1.5%
• Stock funds: about 3%
• Some brokers/banks may offer discounts

Redemption Fees

• Most funds in Taiwan have no redemption fee
• Buying through banks may involve trust management fees (~0.2% annually)

Management Fees (deducted automatically from NAV annually)

• Average: 1%–2.5% per year
• ETFs and passive funds tend to be lower
• Active funds usually higher

Custodian Fees (charged by banks)

• Average: 0.2% per year
• For safekeeping and clearing of assets

Though these fees seem small, over time they can significantly impact returns. For example, investing NT$100,000 with a 2% management fee and 0.2% custodian fee costs NT$2,200 annually. That’s why choosing low-cost funds (especially index funds and ETFs) helps you grow wealth more effectively.

Why Choose Funds: Five Core Advantages

Funds are popular as an investment tool for several deep reasons:

Professional Management — You don’t need to be a stock expert. Fund managers have in-depth market knowledge and research capabilities, monitoring markets 24/7 to make professional investment decisions—something individual investors find hard to do.

Risk Diversification — Funds invest in dozens or hundreds of stocks or bonds, greatly reducing the impact of any single failure. This is the biggest advantage over directly buying individual stocks.

Asset Diversification — Funds can easily access different markets, industries, and asset classes worldwide. A single fund share can achieve global asset allocation, nearly impossible for individual investors.

High Liquidity — Most funds can be bought and sold at any time, allowing quick cash conversion—unlike real estate or other less liquid investments.

Low Investment Threshold — Starting from NT$3,000, far lower than direct stock or property investments. This makes wealth-building accessible to more ordinary people.

The Ideal Investment Cycle for Funds

Another key factor in how funds make money is the investment period. Funds are not short-term trading tools but long-term wealth accumulation:

• Short-term (within 3 months): Not recommended. Market volatility can impact returns, and compound growth is hard to realize.
• Medium-term (1–3 years): You can start seeing noticeable gains, especially with hybrid and bond funds.
• Long-term (over 5 years): The ideal cycle. Stock funds often yield over 10% annualized returns with sufficient time.

Historical data shows that long-term holders tend to achieve much higher average returns than frequent traders. This underscores that “holding steady” often beats “frequent trading” in fund investing.

Start Your Fund Investment Journey

The core answer to how funds make money is: through professional management, risk diversification, long-term compounding, and strategic allocation—letting your idle funds work for you. Choosing suitable fund types, aligning your portfolio with your risk tolerance, understanding all costs, and maintaining a long-term mindset are the keys to successful fund investing.

Remember, the best investment plan is one that helps you achieve your financial goals and allows you to sleep well at night. Start now, and let the power of compound interest grow your wealth through this classic financial tool.