Investment funds also raise funds from a large number of investors and direct them to various financial instruments. The investment fund is essentially a collection (portfolio) of many securities – shares and/or bonds and/or other securities. Each investor who buys units (shares) of an investment fund owns a percentage of the fund’s total portfolio. An individual investor is, therefore, the direct owner of a unit (share) of an investment fund and is only indirectly the owner of a certain part of each instrument purchased by the fund. These institutions dominate the world financial markets today.
Today’s exceptional popularity of investment funds among investors is quite logical: the main reasons why individual investors decide to invest in Investment funds are a lack of knowledge (experience) in choosing securities and/or cash to invest in several different securities. An individual investor achieves professionally by investing in an investment fund. Find out more on räntefonder about it. Investing in mutual funds is sometimes associated with tax breaks. Investment funds are established by management company funds. Fund management companies are mainly subsidiaries of investment banks, universal banks, and insurance companies. By establishing investment funds these financial institutions are expanding the range of their products that they market to the widest base of potential investors.
The establishment and operation of investment funds are strictly regulated everywhere by special laws, and they are supervised by special regulatory institutions. In addition to formally establishing an investment fund, investment fund management companies actively (or passively) manage the created funds.
1. Who guarantees yields?
Open investment fund returns are not guaranteed. They depend on the price of the securities that create the open-end investment fund portfolio. However, investors believe that the advantage of funds over time deposits is precisely the possibility of achieving a higher return than that achieved by a time deposit (which is protected by guarantees and burdened with capital gains tax regardless of the duration of the term deposit). The multi-year average annual returns in open-end investment funds in the world for mixed and equity funds range between 5% and 15%, for bond funds around 5%, and for cash at the level of bank deposits.
2. Can the fund’s assets fail?
The unit price of an investment fund is directly dependent on the price of the securities in which the fund has invested. In this way, each security from the fund’s portfolio affects the value of the unit in proportion to its share in the portfolio. Deposit security is also achieved by investing in a variety of securities. In the case of a fund that holds 100 different securities in its portfolio, the value of the portfolio, ie the price of the fund’s share, depends on the price of each security.
The price of individual security can be reduced or increased. Individual security may become worthless if the issuer initiates e.g. bankruptcy proceedings, and the bankruptcy estate is $ 0.00. In practice, the funds do not “fail” but the company that manages the fund for each fund whose assets for three consecutive months amount to less than $ 5 million by law must initiate the process of liquidation or merger of the fund with another fund.
3. Possible investment with less money
Today, investment funds are the main players in the global financial markets, and they gained popularity precisely because they spare that share buyer additional information about the numerous securities that the fund has at its disposal. You do not have to have experience in stock market trading to invest in an investment fund, and for your money, you get access to people for whom financial asset management is a profession, lower transaction costs, and higher liquidity of your investment, which is sometimes related to tax breaks. Investment funds are established by fund management companies.
4. Can the value of the stakes be reduced? (pay in less than payout)
Yes. The share price rises and sometimes falls in some periods, all depending on the movement of stock prices on the stock exchange. Historically, the trend of securities prices (and the consequent movement of fund unit prices) has been growing. Also, there are always periods when the trend is downward. In order not to withdraw funds from the fund in such periods and thus make a loss, it is important that before investing in a riskier category fund, you plan a long-term investment and thus increase the possibility of achieving a positive return. More precisely, long-term is the rule when investing in riskier funds, ensures the mitigation of negative stock exchange rates, and enables a positive return.
5. What are the basic risks of investing in a fund?
Investing in a fund presupposes taking certain risks. Investment risk in the capital market is the possibility that the return on investment will be negative. In the case of investing in a fund, a negative return may arise as a result of the following risks:
- market movement risks
- risks of investing abroad and risks of the economic environment
- portfolio structure risks
- risks associated with the issuer
- non-financial risks
6. Risk of debt financial instruments
The fund’s assets can also be invested in debt instruments that are differently sensitive to changes in interest rates and other factors that affect the value of debt financial instruments. Interest rate risk It represents the risk of a decrease in the value of the fund’s share resulting from changes in market interest rates that affect the change in the market value of the instruments in which the fund invests. In general, an increase in market interest rates causes a decrease in the market value of fixed-income instruments (bonds), and vice versa. Also, the larger the globally modified duration of the fund, the higher the interest rate risk.
Final thoughts
From all this we can conclude that investments are simply any investments for economic gain or profit and that this should be approached with caution and carefully choose to whom you will entrust your money.
