Investment funds

Investment funds are companies or organized joint ownerships which are collecting funds from a certain number of investors and which are engaged in reinvesting those funds according to the principle of risk spreading and to make its stockholders or members benefit from the results of its asset management.

The US terminology is mutual fund (among others).

Mutual funds are investment vehicles managed by an investment management company which pool funds from its participants called unitholders and invest them according to a specific investment style to earn return for the unitholders and allow diversification opportunities.

A mutual fund is created by forming a legal entity which collects cash from investors and issues them shares called units in proportion of their investment. The fund has a portfolio manager (called fund manager) which invests the cash raised in stocks, bonds, money market or in a combination of all the above asset classes depending on the mutual fund investment mandate.

1. Characteristics: Investment funds

  • Open-ended funds: in an open-ended fund, the number of shares/units and, consequently, of participants cannot, in principle, be determined. The mutual fund may issue new shares/units or redeem existing shares/units. Towards investors, the mutual fund is obliged to redeem shares/units, at its own expenses, at the agreed redemption price and in line with the contractual provisions;
  • Closed-ended funds: in a closed-ended fund, the issue of shares/units is limited to a number determined in advance. As opposed to open-ended funds, the redemption of the shares/units by the fund is not mandatory. Shares/units may only be sold to third parties or, in some cases, on the stock-exchange.
  • All mutual funds charge an annual management fee from its investors which is subtracted in the calculation of the net asset value per share. There are some funds called load funds which charge a fee at the time of issue of new units or redemption of units in addition to the management fee. The mutual funds which do not charge any fee at the time of issuance or redemption of units are called no-load funds. Some funds may charge the additional fee only if investors redeem their units early say before 2 years, etc.
  • The load funds are further classified into front-load funds and back-load funds. The front-load mutual fund is a fund which charges a fee at the time of issuance of new units. For example, if a fund carries 3% front-load fee, $100 of your investment will get you a $97 equity in the mutual fund. On the other hand, back-load fund charges a fee at the time of redemption of units.
Something else -   Purpose and design of the investee

The price of the shares/units depends on market offer and demand. Investment funds

2. Avantages: Investment funds

The holder of shares/units receives part of the income of the fund. Investment funds

As a result of the diversification of the underlying investments made by the fund, the chances of profits increase or, at least, the risks of losses are limited.

For the investments made by the fund, the latter usually benefits from better market conditions (in particular for costs) than the conditions which would apply to the investor if he invested directly in the same products. Investment funds

3. Risks: Investment funds

3.1. Management risk Investment funds

Since the yield of investments made by a fund depends, among other factors, on the capacities of the managers and on the quality of their decisions, errors in the management of the fund may lead to losses or loss of profits. Investment funds

3.2.Risk of a drop in share/unit prices Investment funds

Investment fund shares/units bear the risk of a drop in their prices, this drop reflecting the decrease in value of the financial instruments or currencies that compose the asset portfolio of the fund, any other things remaining equal. Investment funds

The higher the diversification of the investments made by the fund is, the lower at least theoretically, the risks of losses are. Conversely, risks are more important if the fund makes more specialised and less diversified investments. It is therefore important to pay attention to the general and specific risks attached to financial instruments and currencies contained in the fund’s portfolio. Investment funds

The investor must inquire about the risks specific to each fund by consulting, among others, the relevant prospectus. Investment funds

Investment funds

Investment funds

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Something else -   Separation of Insurance Contracts

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