For those who are just starting to enter the world of finance and want to know more about investment funds, we have prepared this practical guide which explains what they are, how they work, their advantages and disadvantages and how to choose the most suitable fund for each investor profile.
Introduction
Investment funds are increasingly popular financial products among small and medium-sized investors. They are collective investment vehicles that allow savers to pool their money to invest in a diversified portfolio of assets. In this article, we are going to explain what mutual funds are, how they work, what their advantages and disadvantages are, and what you should look out for before investing in one. If you are a beginner in the world of finance, this practical guide will help you better understand how to make the most of your money through mutual funds. Let's get started!
How do mutual funds work?
Mutual funds are a collection of investments that are pooled together to be managed by a professional manager who seeks to get the highest possible return. Investors' money is used to purchase a variety of assets, such as stocks, bonds, real estate and other securities.
Investors purchase shares of the fund rather than buying each of the assets individually. The amount each investor owns is proportional to the money invested in the fund.
The fund's performance depends on the performance of the assets in which it invests. If the fund's assets perform well, investors make a profit. If the performance is poor, investors may lose money.
Fund managers charge a fee for their services, called a management fee. This fee is calculated as a percentage of the total value of the fund and can vary depending on the type of fund and the manager.
In general, mutual funds are a convenient way for investors to gain exposure to different types of assets with a single investment and with the supervision of an experienced professional.
Types of investment funds
There are different types of investment funds, some of which are described below:
- Fixed income funds: these are those that invest in debt instruments, such as government bonds, corporate bonds or time deposits. These funds tend to have low to medium risk and are ideal for conservative investors.
- Equity funds: These funds focus on the purchase of shares of publicly traded companies. This type of fund has a higher degree of risk and can have a higher return than fixed income funds.
- Mixed funds: As the name suggests, these funds combine both fixed income and equity instruments. The distribution between the two types will depend on the fund's profile and may vary over time.
- Sector funds: These are focused on a specific industry, such as technology, health or energy. These funds can have high returns if the sector is booming, but may also face higher risks.
- Index funds: Invest in the same stocks that make up a particular stock index, such as the S&P 500. These funds seek to replicate the composition of the index and do not attempt to outperform it.
Each type of fund has its own characteristics and associated risks. It is important to understand them before investing in them in order to make informed decisions about our money.
Fixed income funds
Fixed income funds invest in bonds, treasury bills, promissory notes and other instruments that generate a pre-established fixed income. These funds offer greater stability and safety compared to equity funds, but they also have a lower potential for returns.
Fixed income funds are a good option for conservative investors seeking stable income and for those who wish to diversify their portfolio with a low-risk component.
It is important to consider the investment term when choosing a fixed income fund, as the duration of the fund can affect returns. Funds with a longer duration may offer higher returns, but are also exposed to higher risks.
Equity funds
Equity funds are those that invest in shares of publicly traded companies. These funds seek attractive long-term returns, but also involve higher risks due to the volatility of the stock market.
The managers of these funds are responsible for selecting the companies in which they will invest, based on their fundamental analysis and evaluating factors such as the financial situation, historical track record and future prospects of each company.
It is important to note that equity funds may have different investment objectives and strategies, which may affect their level of risk and potential return. For example, some funds may focus on a specific sector or country, while others may invest in companies from a variety of sectors or countries.
Equity funds are a good option for investors willing to take on more risk in search of higher returns over the long term. However, it is important to have good diversification within the portfolio and be prepared to withstand market fluctuations.
Mixed or balanced
Mixed or balanced funds are those that combine different types of assets, such as stocks, bonds and cash, with the objective of seeking a balance between profitability and security. These funds are usually aimed at moderate investors seeking a higher return than conservative funds, but with a lower level of risk than equity funds.
The asset allocation in commingled funds can vary depending on the fund manager's strategy and market conditions. For example, in a bull market environment, the manager may increase the proportion of equities in the fund to achieve a higher return. On the other hand, in a bear market, he may reduce the exposure to stocks and increase the proportion of bonds to reduce risk.
Risks and rewards
Like any investment, mutual funds carry risks and rewards. It is important to understand the main ones before you invest:
Risks
- Market risk: the prices of the assets in which the fund invests may fluctuate downwards.
- Credit risk: there is a possibility that the issuers of the securities in which the fund invests may not be able to meet their financial commitments.
- Liquidity risk: there may be difficulties in selling certain securities at specific times, especially during periods of high market volatility.
- Currency risk: if the fund invests in assets denominated in foreign currencies, exchange rate fluctuations may affect the value of the investment.
Benefits
- Possibility of diversification: by investing in a fund, you can have exposure to a variety of assets.
- Professionalism: the funds are managed by professional managers with experience in the financial markets.
- Accessibility: funds can be acquired with very small amounts and do not require specialized knowledge to invest.
- Liquidity: most funds allow easy access to your money.
How to invest in a mutual fund
To invest in a mutual fund, you must first follow these steps:
- Decide how much money you want to invest: The first step is to decide how much money you are willing to invest in a fund.
- Research and select the mutual fund that suits your needs: There are many types of mutual funds, each with different objectives and risk levels. Research and select the fund that best suits your needs and investment profile.
- Open an account with the fund provider: Once you have selected the fund, you will need to open an account with the fund provider. This can be done through an online platform or by visiting a physical branch.
- Make your first investment: Once you have opened your account, you can make your first investment. This can be done through the fund provider's website or online platform.
- Keep regular track of your investment: It is important to regularly monitor your investment to make sure you are getting the expected results. You should also be aware of the fees and commissions associated with the fund.
Investing in a mutual fund is an easy and affordable way for beginners to start investing their money. Always remember to research carefully before selecting a fund, as each has different objectives and risk levels.
Steps to invest in a mutual fund
- Research the different types of mutual funds available.
- Choose a mutual fund that fits your investment objectives and risk profile.
- Read the fund's prospectus, which contains important information such as costs, investment strategy and associated risks.
- Contact a brokerage firm or financial institution that offers the mutual fund you wish to purchase.
- Open an account at the brokerage house or financial institution and deposit the desired amount to invest.
- Instruct the brokerage house or financial institution to make the purchase of the mutual fund of your choice.
- Keep track of the fund's performance and consider making adjustments as necessary.
Selecting the right fund
When selecting an investment fund, it is important to consider several factors:
- Investment Objectives: It is important to choose a fund whose investment objective matches our financial needs and long-term goals.
- Risk: All funds have a certain level of risk. It is important to evaluate our risk profile and select a fund that fits it.
- Performance: Past performance does not guarantee future performance, but it is important to evaluate the fund's track record to make an informed decision.
- Custody: It is important to verify who will be the custodian of the fund and that the custodian is reputable and regulated by the appropriate financial authorities.
- Expenses: Funds have associated expenses, such as management or administration fees. It is important to evaluate these expenses and how they can affect our profitability.
In summary, selecting the right fund will depend on our financial objectives, risk profile and specific needs. It is recommended to seek financial advice before making a decision.
Opening an account in a financial institution
To invest in mutual funds it is necessary to have an account opened with an authorized financial institution. Most banks and management companies offer this service.
In order to open an account, it will be necessary to present certain documents such as the DNI or NIE, a proof of address and, in some cases, an income tax return. In addition, some financial institutions may request information on the investor's employment and financial situation.
Once the account has been opened, you can choose the investment fund in which you wish to invest and make the corresponding contributions. It is important to know the fees and expenses associated with the fund before making a decision.
It is advisable to choose a reliable financial entity with experience in the management of investment funds to avoid possible risks. In addition, it is important to have a clear investment plan and diversify the portfolio to minimize risks.
Investment in the selected fund
Once the investment fund that best suits our needs and objectives has been selected, it is time to make the initial investment. This investment can be made in different ways, depending on the fund and the financial institution that manages it.
In general, investment funds allow investing from very accessible amounts, which makes them an interesting option for small savers and for those who wish to diversify their investments.
It is important to bear in mind that when investing in a mutual fund, we are delegating the management of the money to experts in the field. For this reason, it is essential to study well the characteristics of the fund in which we want to invest: its historical profitability, its investment portfolio, its risk management policy, among other relevant factors.
Once the initial investment has been made, it is possible to make periodic contributions to the fund or withdraw part or all of the invested capital at any time. These operations may be subject to commissions and terms established by the financial institution.
Considerations to be taken into account before investing in mutual funds:
- Investment objectives: Before investing, it is important to be clear about your long-term financial objectives.
- Risk: All mutual funds carry a certain level of risk. It is essential to understand the risks involved in investing in a particular fund and make sure that its risk level is in line with your profile.
- Fees and commissions: It is important to study the costs involved in different funds and compare the fees and commissions each one charges. Make sure you are aware of all the charges that apply before investing.
- Diversification: A good strategy is to diversify your investment among different types of assets and sectors, which reduces the overall risk. Mutual funds are a good option to achieve this diversification.
- Permanence in the fund: It is important to consider how long you want to keep your money invested in the fund. Some funds require a minimum commitment, which means that it is possible to incur penalties if you want to withdraw your money before the fixed term.
- Fund background: It is advisable to research the fund's track record before investing. Review its past performance and strategies used, as well as opinions and comments from other investors.
Analysis of the investor profile
Before investing in a mutual fund, it is important to know the investor profile. This profile refers to the investor's attitude towards risk and return. The most common profiles are:
- Conservative: Not willing to take large risks and seeks a moderate and stable return.
- Moderate: Has a certain tolerance for risk and seeks a slightly higher return than the conservative.
- Aggressive: Willing to assume greater risks in search of high profitability.
It is important to bear in mind that there is no one investor profile that is better than another, but that it depends on the characteristics and objectives of each person. It is also advisable to review the prospectus of the investment fund to know its investment policy and its profitability and risk history.
Expenses and fees associated with mutual funds
When investing in a mutual fund, it is important to bear in mind that there are certain expenses and fees associated with its management. The most relevant of these are detailed below:
- Management fee: this is the fee charged by the fund manager for the daily management of the fund. It normally ranges between 1% and 2% per annum.
- Depositary fee: this fee corresponds to the expenses charged by the depositary entity for the custody of the fund's assets. It is usually less relevant than the management fee, but must also be taken into account.
- Subscription or redemption fee: some fund managers charge a fee when a subscription or redemption is made in the fund. This usually ranges between 0.5% and 2%.
- Ongoing expenses: these are the expenses necessary to carry out the management of the fund, such as auditing costs, administration, etc. Their value is usually low, but they must also be taken into account.
When investing in a fund, it is important to know all these expenses and fees in order to be able to assess its real profitability and make informed decisions. In addition, it is advisable to compare the fees between different funds before investing in order to choose the most economical ones.
