Investment Funds An Overview Of The Most Important Things

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Investment Funds An Overview Of The Most Important Things. The money deposited by many savers in a common pot is invested as profitably as possible by the fund managers.

In this way, the money can be distributed among different securities or objects. Since investment funds can usually be sold at any time, they represent an extremely liquid form of investment; so the money is always available. At most if stock exchanges remain closed for a long time, think of the last debt crisis in Greece, or if political unrest broke out, availability could be limited.

We provide information about different types of funds:

  • Bond funds and bond index funds ,
  • Real estate mutual funds ,
  • Equity funds and equity index funds,
  • Ethical and ecological funds

and provide an overview of basic considerations such as risk tolerance, costs and taxes.

Willingness to take risks

Thousands of different funds vie for the favor of large and small investors. There are different investment strategies behind the different funds. If you want to find the right package for you, you should be clear about your personal needs and expectations beforehand .

Which fund is suitable for whom depends primarily on the risk tolerance of the individual investor. If you expect above-average returns, you have to compromise on security, as the value of a risky fund can fluctuate significantly. Those who prefer to be on the safe side should invest in funds that fluctuate less, but also have lower profit expectations. Bond funds, for example, are relatively low-risk because they invest in fixed-income securities. On the other hand, country or sector funds with an investment focus on equities are highly speculative.

Bond funds, bond index funds

The funds invest primarily in government or corporate debt securities. Their value development is particularly dependent on the development of capital market interest rates. However, it is impossible to reliably predict the development of interest rates. When interest rates fall, the value of the bonds increases, the more the longer the term of the bonds is. When interest rates rise, the value falls. Bond funds that invest in bonds with very long residual terms are particularly susceptible to fluctuations in value. In addition, bonds carry the risk that the debtor can no longer meet his payment obligations. Larger losses are therefore possible – especially on bonds from debtors who are not certain that they will repay their debts. Finally, some funds still harbor currency risks when they invest in foreign currency bonds.

So-called bond index funds are particularly recommended for reasons of cost savings. The running costs are often only a fifth of the costs of pension funds, which are usually sold on a commission basis.

Real estate mutual funds

These funds invest primarily in rented commercial real estate . Future income therefore depends largely on whether and to what extent increases in value and rental income are achieved. If foreign properties are included in the portfolio, currency fluctuations also have an impact. In some cases, this risk can be significantly higher than with bond funds .

Open-ended real estate funds can be closed at any time if the market situation makes this step necessary. Then the return of the shares to the investment company can be excluded for several months or even several years. In such cases, it will usually be possible to sell the shares on the stock exchange, but then often with discounts. In individual cases, however, this asset class can be an interesting addition to bond funds, as often only part of the income generated is taxable.

Equity funds, equity index funds

Since the value of the individual investment funds depends on how the stocks develop, greater fluctuations in value and corresponding loss opportunities must be expected. The more stocks from different industries (e.g. chemical industry, financial services, food industry) the investment fund contains, the lower the risk of large losses .

In addition to the distribution across different industries, cross-border diversification also reduces the risk of loss. That’s because advisable to attach great importance to an international diversification across the most important investment regions and across the most important sectors. 

The ongoing annual costs are lowest for equity index funds (ETFs).  In some cases, they are only a tenth of the costs of equity funds, which are usually sold on a commission basis.

Issue surcharges and management fees

Since the costs always reduce the achievable return, important cost factors such as front-end loads and management fees should be as low as possible.

An issue surcharge is a one-time fee for brokering the fund. Administration fees, however, are incurred annually. Essentially, the management fee includes the costs of managing the capital and a follow-up commission for the broker of the investment fund. Only the front-end load can be reduced through negotiation. In the case of sales follow-up commissions, consumers can negotiate in individual cases to have these reimbursed at least partially annually. In the case of so-called index funds (ETFs), there are generally no sales follow-up commissions and sales charges and the investment costs are lower. They are traded on the stock exchange. 

Dividend and interest income

Mutual fund income is taxable income. Exchange rate gains are generally taxed at a flat rate of 25 percent plus solidarity surcharge and church tax.

When it comes to investments, the withholding tax is just one aspect among many. The consumer advice center advises against purchasing certain products for tax reasons alone.

Tips for the consultation

  • Serious financial service providers do not call without being asked. Even advisors who only talk about their product offerings and do not ask about financial and life situation or investment goals are bad advisors.
  • Write down your wishes and the recommendations of your advisor and inquire about the cost of the recommended products.
  • If advisors claim that the expensive products they recommend are worth the money, then be suspicious. After all, many scientific studies show that the more expensive actively managed mutual funds perform worse than the cheaper index funds in the long term. And the crystal ball, which shows the successful investments of the future, has not yet been invented.
  • Therefore, note down all the sales arguments of the product broker or advisor and have your records countersigned, then you have better cards in the event of incorrect advice!

Hello, I have been working as an investment consultant and author for more than 20 years. I love what I do and I have enriched everyone around me. A lot of money is not important, the main thing is how you use the money.

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