greenieS
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How do you choose an investment fund?
Given that an investor has at least a few hundred if not a few thousand funds at hand - given the opening of the local market for all funds operating under European law, choosing a fund to make investments means nothing more than identifying the one. more appropriate ratio of risks to potential gains. A process that involves a high degree of subjectivism as both openness to risk and appetite for earnings are elements that can differ radically from one investor to another.
In this regard, the first and most important step that an investor must take is to clearly set the limits of the risks that he is willing to take. And depending on them to choose the most appropriate category of funds, and subsequently, the fund with the investment strategy and policy that best suits its expectations.
Thus, in a classification accepted at European level, depending on the portfolio structure (of investments), with a direct impact on the risks they can assume, but also on the potential to make significant gains, the funds can be classified in the following 4 major categories, each with its own sub-categories:
A. Monetary funds - are those funds that invest predominantly, ie at least 90% of the value of the portfolio, in monetary instruments (such as certificates of deposit, government securities, other money market instruments) and deposits made with credit institutions (banks ). Monetary funds are characterized by a low degree of risk and, in general, a modest but relatively steady increase in the value of securities. Also, access to money is very fast and cheap in terms of fees and subscription / redemption fees. This type of funds can be considered an alternative to the classic current account, offering a liquidity comparable to it, but also gains comparable to those brought by a term deposit. In turn, monetary funds fall into two categories:
Short-term monetary funds - those with an average duration of investments of up to 60 days;
Standard Monetary Funds - those with an average duration of the final maturity of investments of up to 1 year;
B. Bond funds - are those funds that invest predominantly, ie over 80%, in fixed income financial instruments (such as municipal, state or corporate bonds, or other fixed income financial instruments). They have a low degree of risk - even if higher than that recorded by the monetary funds, but they usually offer slightly better returns;
C. Equity funds: which invest predominantly, ie more than 85% of their assets, in equities. Equity funds are the most risky class of funds because they are highly exposed to stock market fluctuations. However, returns can be commensurate with the risks.
D. Mixed (diversified) funds - are funds that offer investors combinations between the types of investments mentioned above, in different proportions. Their degree of risk is determined by the share of risky financial instruments in relation to that of less risky financial instruments in the total portfolio, which can vary greatly along the scale of risk levels. They can be divided, in turn, into:
Defensive - which can take a maximum exposure of 35% per share
Balanced - which can take a stock exposure between 35% and 65%
Dynamic - with a share exposure of over 65%
Flexible - having a mix of tools with varying weights and holding times, so stock exposure can range from 0% to 100%.
Remember: As a rule, the higher the earning potential of a fund, the greater the risks assumed by its investors. CAREFUL! Before investing, thoroughly research all aspects of your choice (fund, administrator, tax regime, etc.). Read the fund documents in advance and ask for explanations whenever you feel the need.
Given that an investor has at least a few hundred if not a few thousand funds at hand - given the opening of the local market for all funds operating under European law, choosing a fund to make investments means nothing more than identifying the one. more appropriate ratio of risks to potential gains. A process that involves a high degree of subjectivism as both openness to risk and appetite for earnings are elements that can differ radically from one investor to another.
In this regard, the first and most important step that an investor must take is to clearly set the limits of the risks that he is willing to take. And depending on them to choose the most appropriate category of funds, and subsequently, the fund with the investment strategy and policy that best suits its expectations.
Thus, in a classification accepted at European level, depending on the portfolio structure (of investments), with a direct impact on the risks they can assume, but also on the potential to make significant gains, the funds can be classified in the following 4 major categories, each with its own sub-categories:
A. Monetary funds - are those funds that invest predominantly, ie at least 90% of the value of the portfolio, in monetary instruments (such as certificates of deposit, government securities, other money market instruments) and deposits made with credit institutions (banks ). Monetary funds are characterized by a low degree of risk and, in general, a modest but relatively steady increase in the value of securities. Also, access to money is very fast and cheap in terms of fees and subscription / redemption fees. This type of funds can be considered an alternative to the classic current account, offering a liquidity comparable to it, but also gains comparable to those brought by a term deposit. In turn, monetary funds fall into two categories:
Short-term monetary funds - those with an average duration of investments of up to 60 days;
Standard Monetary Funds - those with an average duration of the final maturity of investments of up to 1 year;
B. Bond funds - are those funds that invest predominantly, ie over 80%, in fixed income financial instruments (such as municipal, state or corporate bonds, or other fixed income financial instruments). They have a low degree of risk - even if higher than that recorded by the monetary funds, but they usually offer slightly better returns;
C. Equity funds: which invest predominantly, ie more than 85% of their assets, in equities. Equity funds are the most risky class of funds because they are highly exposed to stock market fluctuations. However, returns can be commensurate with the risks.
D. Mixed (diversified) funds - are funds that offer investors combinations between the types of investments mentioned above, in different proportions. Their degree of risk is determined by the share of risky financial instruments in relation to that of less risky financial instruments in the total portfolio, which can vary greatly along the scale of risk levels. They can be divided, in turn, into:
Defensive - which can take a maximum exposure of 35% per share
Balanced - which can take a stock exposure between 35% and 65%
Dynamic - with a share exposure of over 65%
Flexible - having a mix of tools with varying weights and holding times, so stock exposure can range from 0% to 100%.
Remember: As a rule, the higher the earning potential of a fund, the greater the risks assumed by its investors. CAREFUL! Before investing, thoroughly research all aspects of your choice (fund, administrator, tax regime, etc.). Read the fund documents in advance and ask for explanations whenever you feel the need.
