One of the main dilemmas when starting to save in the medium or long term is to ask yourself, where do I save it so it generates attractive returns? and what is the risk?
Investment Funds offer a balance between performance and risk, here you will learn the basic aspects that you should know.
How long have investment funds existed?
They are not improvised investment instruments, in the year 1894 is when the origin of the funds in the US called “Boston Personal Property Trust” occurs. In 1925, Investment Funds appear in France and until 1952 in Italy. Today they are managed by professionals and entities supervised by public bodies, which are in turn supervised by the National Securities Market Commission (CNMV in Mexico), responsible for meeting the liquidity, diversification, and transparency requirements required by the regulation to ensure investor protection.
What is an investment fund and who forms it?
An investment fund is constituted and managed by an investment company. It is a diversified portfolio, which according to its information prospectus, is made up of various financial investment instruments, which are managed by professionals or by financial institutions. Investment funds work by pooling the capital of various investors and that pooled amount is used to buy different classes of assets, which one, individually, could not access because they do not have large capital. The money is invested following a well-defined strategy that seeks to optimize resources.
Knowing and differentiating the different types of investment funds will help us weigh the advantages and risks of each one and decide which one to invest our money in based on our objectives and our profile. Among more than eight types of funds, these are the most common.
Types of investment funds:
- Fixed-income funds, assets are invested mainly in fixed-income assets (such as bonds, debentures, promissory notes, or treasury bills). The duration varies depending on the term of the investment. The performance of fixed-income funds is linked to the evolution of interest rates. In addition, the shorter the maturity of the assets, the lower the risk but also the potential return.
- Equity funds, this type of fund invests most of their assets (at least 75%) in shares. In the market, there is a wide variety of funds according to the geographical area, the sector, and the capitalization of the companies in which it is invested. Equity funds are divided into subcategories based on the market in which they invest (Spain, Euro Zone, United States, etc.), the sectors (energy, telecommunications, technology, etc.), or other characteristics that define the funds. invested in, such as market capitalization or company size. Equity funds offer higher potential returns than fixed-income funds, associated with greater risk.
- Mixed funds are funds with exposure to both fixed-income and variable-income assets. Depending on the fund, the percentage of investment in each of these assets varies: In mixed fixed-income funds, the investment in variable-income assets will be less than 30%; in mixed variable-income funds, the investment in variable-income will be between 30% and 75% of the total. It is important to know this ratio as it will determine the risk associated with the fund and its potential return. Thus, when the mixed fund has a higher percentage of investment in fixed income, the return potential is lower, but so is the risk. Similarly, the higher the percentage of investment in equities, the greater the return potential but also the risk assumed by the participant.
- Global funds are funds that can invest in a wide universe of assets without predetermined percentages. This type of fund does not have a defined investment policy that fits it into the previous categories. They are free not to establish maximum investment percentages in fixed or variable income or to determine the geographical distribution of the investments. This means that global funds have a high level of risk associated with them.
Other funds, other types of investment funds have a different operation than usual, due to their legal form, their liquidity, the type of assets in which they invest or the strategy they follow, and to which some aspects of the regulations governing the funds, which is why they are associated with a higher level of risk. They are, among others, ETFs (traded funds), Hedge Funds (free investment funds), funds of funds, or real estate investment funds.
How do you make money with an investment fund?
Unlike investing in shares of companies where you purchase the share at a price on the date of the operation, the return of an investment fund is obtained as the difference in the net asset value of its shares between one period and the following period. This result (which can be positive or negative) is expressed as a percentage change for better understanding. Example: A security from Investment Fund G is purchased for USD 1.70 per security and at the end of the month this security has a value of USD 2.05. In this case, the price differential will be the surplus value obtained.
Some of the advantages of investing in an investment fund
- You keep the value of money above inflation.
- Lower risk, by investing in a diversified portfolio, which can sometimes contain a combination of more than 50 instruments, including bonds, indices, stocks, ETFs, fibers, and even funds of funds.
- They are actively managed by professionals, so they are updated daily (mostly) according to investment trends.
- Most of the funds and depending on where they are distributed allow a low investment with the promise of high returns.
When choosing where to invest, it is important to distinguish your investor profile, the objective of these savings, and the term. Choose according to your goals.