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First of all, let's start by defining exactly what these investment funds are.
Also known as mutual funds or collective investment schemes, they are entities whose main purpose is to attract and pool the money of several private investors.
With the help of the collected sums, investments are made in various instruments, in order to generate earnings.
How the money is raised
First of all, we must remember that the investment in these mutual funds is made by purchasing units of fund.
They can be seen as the equivalent of the shares of a joint stock company, if you will.
The difference is that, unlike shares, which come in a limited number issued by a certain company, the fund units are issued continuously and can be bought and sold at any time.
The value of a particular fund unit is determined as the ratio of the net asset value of the fund to the number of units issued.
How are the funds managed?
The amounts accumulated by an investment fund through the sale of fund units are managed by the administrator of the respective fund, which is called the Investment Management Company or SAI.
Using their own knowledge and infrastructure, these SAIs will place the money raised in various instruments, according to the investment policy and strategy, which is made public through a series of mandatory documents.
Among them, the most important would be the Fund Prospectus and the Key Investor Information Document - DICI.
Based on them, the interested persons will be able to choose from various variants of existing investments, which will be made by the fund, using the public money.
Closed and open funds - what they are
Depending on the trading of fund units, there are two major types of mutual funds. These are:
Open-end investment funds
As the name suggests, these mutual funds will issue and redeem units of continuous fund.
Thus, potential investors will be able to invest and / or redeem their fund units at any time they want, as long as that mutual fund is active.
The value of the fund unit is determined on a daily basis, depending on the return on investments made by the ASI.
Such funds generally have a running time that is not limited in time or number of investors.
Closed-end investment funds
Unlike open-ended funds, closed-ended funds have a much stricter policy regarding the trading of fund units.
They can only be purchased and sold at certain predetermined intervals through the Fund's Documents.
In general, such mutual funds have a limited lifespan, which will also be found in the documents.
At the end of the period, the fund is liquidated and the resulting amounts are divided among the investors, according to the number of fund units that each of them holds.
Types of investment funds
In addition to the typology determined by the possibility of trading the fund units, the mutual funds are also differentiated by the investments they will make.
Thus, a potential investor will be able to choose between:
Equity funds
An equity investment fund will place the money accumulated mainly (more than 85% of the amounts managed) in shares listed on the stock exchange, which are issued by various companies.
When a person chooses to place money in such a fund, then the individual will automatically become a shareholder of the companies in which he invests the fund.
As with traditional stock-based trading, if the issuing company is profitable, investors earn because the value of each share will increase and / or the company will distribute dividends to shareholders.
On the other hand, if the company in question incurs losses, investors will lose money, some of which risk losing even the entire amount invested.
The risks of these types of funds
Over time, investing in equities, whether individual or mutual funds, has proven to be extremely profitable and is the fastest way to increase one's wealth.
However, it is not uncommon for large companies to see significant declines in their share prices. That is why there is a good chance that the losses will be considerable.
Consequently, even if when we talk about return on investment funds, the ones on shares have the best figures, they come with some very high risks that must be assumed by each investor.
Although those who manage the amounts accumulated through the fund units are generally very experienced, all that is needed is one unfavorable news for the shares of a company to collapse.
That would result in significant loss of money.
Bond funds
A bond investment fund will place the money mainly in bonds (over 80% of the funds). Bonds are securities that look like loans.
They are issued by various companies, local municipalities or state authorities, which undertake to repay to investors, at a certain well-established due date, the amount borrowed by them plus an annual interest accrued for the entire duration of the "loan".
Just like stocks, bonds can be listed on the stock exchange. Unlike stocks, however, bonds have more stable values overnight and come with a slightly lower degree of risk.
The risks of these types of funds
Bond funds are not without risks either. The biggest of these would be the evolution of interest rates.
Most bonds are issued under a fixed interest rate. However, it may decrease or increase as follows:
If the interest rate on the money market decreases, then the bonds will increase in value
If the interest rate on the money market increases, then the bonds will decrease in value
In much rarer cases, where the bonds have been issued with a variable interest rate, then their value will increase or decrease in direct proportion to the evolution of interest rates on the money market (they will increase or decrease together).
On the other hand, those investment funds that are mostly based on bonds also come with a risk that the issuer will be unable to pay at maturity and will not be able to redeem the bond or interest due.
When this happens, the nominal value of the bonds will automatically decrease, which will mean that investors will lose money.
Even so, owning one is still beyond the reach of the average person.
Monetary funds
Here we come to the safest investment funds - the monetary funds.
Their management invests more than 90% of the money accumulated in monetary instruments, such as bank deposits or government securities.
As you can imagine, the risks of such investments are extremely low, although not completely excluded. Automatically, the profits generated will be commensurate, so very low.
In most cases, these mutual funds will not have a much higher return on inflation.
Consequently, such tools are usually seen as ways in which people can maintain the purchasing power of their money without enjoying sensational results.
The risks of these types of funds
Even in the case of these investment funds, you will not be guaranteed a return on the money invested, much less positive returns.
There is a possibility that the banking institutions in which the fund placed the money will go bankrupt, for example, which will generate losses for all those who contributed money.
Unlike individual deposits, those in which mutual funds invest are not provided by the Guarantee Fund.
Mixed funds
Mixed or diversified mutual funds are the most used by investors and offer potential clients various combinations between the investment options presented above, in different proportions.
The degree of risk of each investment package will be determined by the ratio between risky and safe financial instruments.
A very useful indicator to identify the exposure of a type of mixed mutual fund is the share of investments in shares in the portfolio. The higher it is, the higher the risk.
In general, you will be able to choose between the following options, although the figures below are rather estimates and may vary depending on the fund manager you use:
Defensive packages - which have a maximum of 30-35% of the money placed in shares
Balanced packages - which come with an exposure of 30-65% per share
Dynamic packages - whose funds are more than 65% invested in shares
Flexible packages - automatically change the degree of risk you take at certain intervals
How these mutual funds work
Now that you know exactly what and how many mutual funds are, we think it would be good to explain in more detail how these tools work.
First of all, however, we would like to inform you that both the purchase and sale of fund units will be made at an unknown value of the unit, which it will have the day after the application for subscription or redemption. .
The reason for the gap is simple - to avoid speculative investments.
Buying fund units
Basically, when a potential investor wants to put the money in a mutual fund, he will have to buy units of the fund.
This purchase transaction is also called a subscription.
The price and value of the unit are determined periodically - daily or at a longer time, predefined, depending on the type of fund (closed or open).
The value of a fund unit is determined as follows:
From the total assets (or the value of all current investments that the fund has assets), operating expenses are deducted to result in net assets.
The net asset is divided by the number of units of issue issued and not redeemed to determine the individual price of a unit at a given time.
Redemption of fund units
Selling fund units is the reverse process of subscribing.
When he feels it is time to withdraw the money invested, the client of a mutual fund asks the Fund Manager to buy the units he owns.
This sale operation is also called redemption.
He will receive in return the amount of money related to the number of units held (calculated the same as above), minus any fees and commissions related to the transaction (which can be found in the Fund Documents).
Mutual funds are required by law to accept the sale of units in the fund at the request of the holder.
Depository
Another quite important entity that is involved in the proper functioning of these investment funds is the Depositary.
It is represented by a credit institution whose main role is to keep all the fund's assets safe.
Moreover, the Depositary has the task of verifying, certifying and answering for a correct record of the fund units and of the gross and net assets.
Based on the data provided by the Depositary, the value of the subscriptions and redemptions of the securities issued by the fund will be determined.
All the entities involved in this process - investment fund, SAI and Depositary - are authorized, controlled and closely supervised by the state authorities, operating on the basis of clear national and European regulations.
Advantages and disadvantages
Let's talk about the pros and cons of these mutual funds:
Benefits
Anyone can invest, no matter what their experience. The money is managed by competent people with extensive experience in the field of investments, who know exactly how to do their analysis so as to generate profits.
Automatic portfolio diversification, which is the key to well-thought-out investments, as this reduces risk.
You can start by investing small amounts of money, as long as they are enough to buy at least one fund unit.
You can place and withdraw money whenever you want, because mutual funds are required by law to accept the sale and redemption of securities at any time.
Yields of investment funds clearly higher than those related to bank deposits.
disadvantage
Fees, commissions, administration costs - all this will have to be paid, regardless of the result of the investment fund in which you want to invest. There are fees for subscription, redemption, payment of the Depositary, etc.
Profit tax - will have to be paid to the state from the amounts earned.
You have no control over the placement - this may seem like an advantage to the less experienced, but more knowledgeable people may want more freedom in how their money is invested.
The risk of poor quality management - although in general those in the Fund Manager do not hire people with disabilities to manage investments, there may be situations in which, due to poor management of funds, investors end up losing money.
Also known as mutual funds or collective investment schemes, they are entities whose main purpose is to attract and pool the money of several private investors.
With the help of the collected sums, investments are made in various instruments, in order to generate earnings.
How the money is raised
First of all, we must remember that the investment in these mutual funds is made by purchasing units of fund.
They can be seen as the equivalent of the shares of a joint stock company, if you will.
The difference is that, unlike shares, which come in a limited number issued by a certain company, the fund units are issued continuously and can be bought and sold at any time.
The value of a particular fund unit is determined as the ratio of the net asset value of the fund to the number of units issued.
How are the funds managed?
The amounts accumulated by an investment fund through the sale of fund units are managed by the administrator of the respective fund, which is called the Investment Management Company or SAI.
Using their own knowledge and infrastructure, these SAIs will place the money raised in various instruments, according to the investment policy and strategy, which is made public through a series of mandatory documents.
Among them, the most important would be the Fund Prospectus and the Key Investor Information Document - DICI.
Based on them, the interested persons will be able to choose from various variants of existing investments, which will be made by the fund, using the public money.
Closed and open funds - what they are
Depending on the trading of fund units, there are two major types of mutual funds. These are:
Open-end investment funds
As the name suggests, these mutual funds will issue and redeem units of continuous fund.
Thus, potential investors will be able to invest and / or redeem their fund units at any time they want, as long as that mutual fund is active.
The value of the fund unit is determined on a daily basis, depending on the return on investments made by the ASI.
Such funds generally have a running time that is not limited in time or number of investors.
Closed-end investment funds
Unlike open-ended funds, closed-ended funds have a much stricter policy regarding the trading of fund units.
They can only be purchased and sold at certain predetermined intervals through the Fund's Documents.
In general, such mutual funds have a limited lifespan, which will also be found in the documents.
At the end of the period, the fund is liquidated and the resulting amounts are divided among the investors, according to the number of fund units that each of them holds.
Types of investment funds
In addition to the typology determined by the possibility of trading the fund units, the mutual funds are also differentiated by the investments they will make.
Thus, a potential investor will be able to choose between:
Equity funds
An equity investment fund will place the money accumulated mainly (more than 85% of the amounts managed) in shares listed on the stock exchange, which are issued by various companies.
When a person chooses to place money in such a fund, then the individual will automatically become a shareholder of the companies in which he invests the fund.
As with traditional stock-based trading, if the issuing company is profitable, investors earn because the value of each share will increase and / or the company will distribute dividends to shareholders.
On the other hand, if the company in question incurs losses, investors will lose money, some of which risk losing even the entire amount invested.
The risks of these types of funds
Over time, investing in equities, whether individual or mutual funds, has proven to be extremely profitable and is the fastest way to increase one's wealth.
However, it is not uncommon for large companies to see significant declines in their share prices. That is why there is a good chance that the losses will be considerable.
Consequently, even if when we talk about return on investment funds, the ones on shares have the best figures, they come with some very high risks that must be assumed by each investor.
Although those who manage the amounts accumulated through the fund units are generally very experienced, all that is needed is one unfavorable news for the shares of a company to collapse.
That would result in significant loss of money.
Bond funds
A bond investment fund will place the money mainly in bonds (over 80% of the funds). Bonds are securities that look like loans.
They are issued by various companies, local municipalities or state authorities, which undertake to repay to investors, at a certain well-established due date, the amount borrowed by them plus an annual interest accrued for the entire duration of the "loan".
Just like stocks, bonds can be listed on the stock exchange. Unlike stocks, however, bonds have more stable values overnight and come with a slightly lower degree of risk.
The risks of these types of funds
Bond funds are not without risks either. The biggest of these would be the evolution of interest rates.
Most bonds are issued under a fixed interest rate. However, it may decrease or increase as follows:
If the interest rate on the money market decreases, then the bonds will increase in value
If the interest rate on the money market increases, then the bonds will decrease in value
In much rarer cases, where the bonds have been issued with a variable interest rate, then their value will increase or decrease in direct proportion to the evolution of interest rates on the money market (they will increase or decrease together).
On the other hand, those investment funds that are mostly based on bonds also come with a risk that the issuer will be unable to pay at maturity and will not be able to redeem the bond or interest due.
When this happens, the nominal value of the bonds will automatically decrease, which will mean that investors will lose money.
Even so, owning one is still beyond the reach of the average person.
Monetary funds
Here we come to the safest investment funds - the monetary funds.
Their management invests more than 90% of the money accumulated in monetary instruments, such as bank deposits or government securities.
As you can imagine, the risks of such investments are extremely low, although not completely excluded. Automatically, the profits generated will be commensurate, so very low.
In most cases, these mutual funds will not have a much higher return on inflation.
Consequently, such tools are usually seen as ways in which people can maintain the purchasing power of their money without enjoying sensational results.
The risks of these types of funds
Even in the case of these investment funds, you will not be guaranteed a return on the money invested, much less positive returns.
There is a possibility that the banking institutions in which the fund placed the money will go bankrupt, for example, which will generate losses for all those who contributed money.
Unlike individual deposits, those in which mutual funds invest are not provided by the Guarantee Fund.
Mixed funds
Mixed or diversified mutual funds are the most used by investors and offer potential clients various combinations between the investment options presented above, in different proportions.
The degree of risk of each investment package will be determined by the ratio between risky and safe financial instruments.
A very useful indicator to identify the exposure of a type of mixed mutual fund is the share of investments in shares in the portfolio. The higher it is, the higher the risk.
In general, you will be able to choose between the following options, although the figures below are rather estimates and may vary depending on the fund manager you use:
Defensive packages - which have a maximum of 30-35% of the money placed in shares
Balanced packages - which come with an exposure of 30-65% per share
Dynamic packages - whose funds are more than 65% invested in shares
Flexible packages - automatically change the degree of risk you take at certain intervals
How these mutual funds work
Now that you know exactly what and how many mutual funds are, we think it would be good to explain in more detail how these tools work.
First of all, however, we would like to inform you that both the purchase and sale of fund units will be made at an unknown value of the unit, which it will have the day after the application for subscription or redemption. .
The reason for the gap is simple - to avoid speculative investments.
Buying fund units
Basically, when a potential investor wants to put the money in a mutual fund, he will have to buy units of the fund.
This purchase transaction is also called a subscription.
The price and value of the unit are determined periodically - daily or at a longer time, predefined, depending on the type of fund (closed or open).
The value of a fund unit is determined as follows:
From the total assets (or the value of all current investments that the fund has assets), operating expenses are deducted to result in net assets.
The net asset is divided by the number of units of issue issued and not redeemed to determine the individual price of a unit at a given time.
Redemption of fund units
Selling fund units is the reverse process of subscribing.
When he feels it is time to withdraw the money invested, the client of a mutual fund asks the Fund Manager to buy the units he owns.
This sale operation is also called redemption.
He will receive in return the amount of money related to the number of units held (calculated the same as above), minus any fees and commissions related to the transaction (which can be found in the Fund Documents).
Mutual funds are required by law to accept the sale of units in the fund at the request of the holder.
Depository
Another quite important entity that is involved in the proper functioning of these investment funds is the Depositary.
It is represented by a credit institution whose main role is to keep all the fund's assets safe.
Moreover, the Depositary has the task of verifying, certifying and answering for a correct record of the fund units and of the gross and net assets.
Based on the data provided by the Depositary, the value of the subscriptions and redemptions of the securities issued by the fund will be determined.
All the entities involved in this process - investment fund, SAI and Depositary - are authorized, controlled and closely supervised by the state authorities, operating on the basis of clear national and European regulations.
Advantages and disadvantages
Let's talk about the pros and cons of these mutual funds:
Benefits
Anyone can invest, no matter what their experience. The money is managed by competent people with extensive experience in the field of investments, who know exactly how to do their analysis so as to generate profits.
Automatic portfolio diversification, which is the key to well-thought-out investments, as this reduces risk.
You can start by investing small amounts of money, as long as they are enough to buy at least one fund unit.
You can place and withdraw money whenever you want, because mutual funds are required by law to accept the sale and redemption of securities at any time.
Yields of investment funds clearly higher than those related to bank deposits.
disadvantage
Fees, commissions, administration costs - all this will have to be paid, regardless of the result of the investment fund in which you want to invest. There are fees for subscription, redemption, payment of the Depositary, etc.
Profit tax - will have to be paid to the state from the amounts earned.
You have no control over the placement - this may seem like an advantage to the less experienced, but more knowledgeable people may want more freedom in how their money is invested.
The risk of poor quality management - although in general those in the Fund Manager do not hire people with disabilities to manage investments, there may be situations in which, due to poor management of funds, investors end up losing money.
