How does a fund savings plan work?
As an investor in a fund savings plan, you need a securities account that you can set up yourself with a bank, broker or fund company. At this point you should already think carefully about who you would like to set up your securities account with: For example, your room for maneuver in terms of fund selection is very limited with a fund company. If you want to change your investment focus here and consequently choose a fund from another company, you would have to open a new custody account. A custody account with a direct bank or broker gives you a lot more choice – here you can usually access a fund universe of several thousand funds from different companies.
But which funds are actually suitable for a fund savings plan? Here is a small list of the types of funds that you can use to realize your fund savings plan:
- Equity funds
- ETFs (listed index funds)
- Bond funds (fixed income)
- Mixed funds from stocks, bonds, certificates, real assets, etc.
- Money market funds
When you have decided on a deposit and know which fund you want to save first, you should decide how high your savings rate should be.
Tip for choosing a deposit: Depots that are managed without an administrative fee are particularly attractive. This is often the case when shares are regularly acquired as part of a fund savings plan.
Who is a fund savings plan suitable for?
Fund savings plans are suitable for investors who want to achieve an above-average return for their money and are prepared to accept the risk of loss.
The long-term development of share prices compared to fixed-income investments speaks for itself – those who can “sit out” temporary economic crises and phases of economic weakness often achieve significantly more value growth with shares in the long term. Fund savings plans are suitable for investors who want to build up wealth in the medium and long term. It does not matter whether grandparents want to save for their grandchildren, employees want to invest capital-building benefits as profitably as possible, or whether the fund savings plan is used to build up private retirement provision.
Fund savings plans are not only suitable for friends of stocks. With the exception of money market funds, whose returns are too unattractive for a long-term investment, there are other funds available for cautious investors:
- Mixed funds invest in various asset classes such as stocks, bonds, commodities, real estate, etc.
- ETFs (Exchange Traded Funds) are exchange-oriented index funds that replicate a stock index
- Pension funds invest customer money exclusively in bonds and rely on above-average returns in terms of purchase price and interest
What are the advantages of a fund savings plan?
Basically: Fund units are subject to price fluctuations. These are lower for bond, mixed and open real estate funds than for equity funds. Nevertheless, the average cost effect occurs: savers acquire a different number of fund shares every month with a fixed monthly savings rate. As a rule, this has a positive effect on the overall performance of the investment: There is usually a front-end load when purchasing investment fund units. This is a one-time fee that you have to pay when purchasing fund units. Many direct banks and online brokers offer attractive discounts here. And in the case of fund savings plans, many providers even forego the initial charge entirely.
The reason for this positive performance: When prices rise, the more cheaply bought shares show an above-average performance. So, in return the positive effect on the total return.
Mutual funds are often offered in a distributing and an accumulating variant. If you, as a fund saver, invest in a distributing fund, the interest and dividends on the securities contained in the fund are paid out to you annually. Accumulating funds, on the other hand, retain the dividend and interest income generated and reinvest them, which increases the value of your fund units. Accumulating funds are therefore well suited for investors who forego distributions and would prefer to save the largest possible fund assets.
Another big plus: fund savings plans allow the greatest possible flexibility. However, this statement only applies to savings plans that are not subject to any state subsidies. The classic savings plan has no time restrictions. There is neither a maximum duration nor a minimum duration. In addition, the fund savings plan allows all “usage options” in addition to regular savings: You can buy additional shares at will, suspend the deposit, increase it or reduce it to the minimum amount. You are also free to sell fund units if you need money for a purchase.
How safe is my money?
Funds that invest in volatile (fluctuating) values such as stocks or bonds generally offer greater earnings opportunities, but also a higher risk due to possible price losses. If you are looking for high returns, you can invest in individual companies, industries or regions. As a more security-oriented investor, broadly diversified funds are available to you, which distribute your capital across different asset classes to minimize the risks. The fund shares you have acquired with the fund savings plan are, by the way, legally protected special assets that are not lost even if the fund company goes bankrupt. In this case, the custodian bank takes on the management of the investment fund.
Taxation with a fund savings plan
Investment income such as interest, dividends and realized capital gains are generally taxable, even if they are generated with a fund. The custodian institution automatically withholds 25% withholding tax plus solidarity surcharge and church tax on your capital income and pays this amount to the tax office. Your tax liability as a fund saver is thus settled. The tax rate is 15%. In return, investors sometimes do not have to pay any withholding tax on distributions and price gains from their funds. The amount of the tax-exempt income component depends on the type of investment fund . In the case of equity funds with at least 51% equity shares, 30% of the income is tax-free for the investor, in mixed funds with at least 25% equity share it is 15% of the income. 60% of income from real estate funds is tax-free, and 80% for funds with predominantly foreign real estate.