Today we are going to talk about investment funds so that we can all understand how they work without complex definitions.
What is an investment fund
An investment fund is simply an agreement made between a group of people who collectively invest their money in some type of asset. This collective investment has a very simple objective: to achieve a higher return than that accessible by investing separately.
Investment funds can invest in various financial products. Some of them are stocks , bills , bonds , currencies , ETFs. But they can also invest in non-financial products such as real estate, art …
Let’s imagine that we agreed with 10 friends to share an investment among all. The first question we will ask ourselves is who out of the 10 friends knows anything about finances. If there is no one who dares to handle this issue, the best solution is to hire a specialized investment company. This company is called a management company .
Next, the question of who will guard all those assets or money needs to be addressed. Since we are naturally suspicious and / or cautious, the solution is to deposit the money (or assets) in a depository entity, with the objective of keeping that money safely.
All the people who participate in the investment are called participants. The return that each investor will receive will be established based on the collective results.
It is important to know that there are different types of investment funds since they can be classified in very different ways. The most popular classification is the one that divides the types of funds according to their investment vocation.
Main advantage of investment funds
The great advantage of investment funds is that it is not necessary to have a lot of money to start investing. Let’s see an example to explain it more easily.
I imagine that you have 1000 euros destined to invest. It is very difficult to make a diversified investment with only 1000 euros without having to spend your time carefully managing small investments.
If you invest in shares of companies you will be in one of these two situations:
- All the money is invested in one or two companies, which involves great risk.
- The amount in each company is so small that the sales commissions will practically “eat" all your possible benefits.
But instead, an investment fund can accept 1,000 euros from 1,000 people and thus have 1 million euros to invest. With this amount, you can invest in a wide variety of investments without losing out on commissions or other applied expenses.
In addition, investment funds provide you with another and that is that you can transfer the money from one investment fund to another without paying capital gains or any other cost. You would only pay the capital gain for the benefits obtained if you sell your units in the investment fund.
Components of investment funds
Although we have explained them previously, I would like to expose them more clearly so that we do not confuse concepts in something as important as an investment fund.
The main components of an investment fund are the following:
Participants
Unitholders are those investors who invest their money. Their capital is destined to a common patrimony of the fund and in exchange they receive participations from it in proportion to the amount they have invested.
Participations
Units are all equal parts into which the assets of an investment fund are divided. This number of units does not have to be fixed, it depends on the purchase of the units (subscription) or sale (redemption).
The value of the units is variable. Its value on a specific day is known as the net asset value of the investment fund. For this reason, the units are negotiable, although they are not traded on any market. It is the management company itself that sells or repurchases the investment fund shares.
Management company
The management company administers and manages the fund. It is what determines which investment policy is to be followed. In other words, the management company decides where the assets of the fund formed by the contributions of the participants will be invested.
There will only be one management company for each investment fund. Although this will be able to manage different investment funds at the same time. The managers charge subscription and redemption fees . Likewise, they charge other commissions for the result, for the management , for the control of the depositary company, for the accounting and for the periodic reporting for the CNMV.
Depository Company
It is the one where the money is deposited. It could be a bank, a savings bank or a securities company. Its function is to guard the assets of the fund, assets that can be made up of assets or cash. In addition, the depositary company performs control functions over the manager, all for the benefit of investors.
How can we get money back from an investment fund?
As we already know, investment funds are divided into units. When we invest in a mutual fund, we actually buy a certain number of units, which have a certain value.
As the value of the investment fund increases, the value of the units also increases and vice versa.
Therefore, to recover the money invested, you simply have to sell the units you have in the investment fund (all or part of them depending on the amount you want to recover) .
