Editor’s note: This article was first published in July 2010; its discussion of investment funds does not cover index funds or ETFs, whose low fees change much of the argument about fees.
Investing in investment funds means pooling the capital of a group of people and delegating the management of their savings to a management company that is in charge of investing them, charging a fee for that work or service.
The return on this kind of investment depends on the make-up of the chosen fund and on how the financial markets perform.
We need to consider and analyse the time frame we want to choose, and make sure the management company that will invest our savings is professional and transparent. By transparent I mean that it lets us follow at all times where the fund’s savings are being invested and what return they are earning. Needless to say, we must make sure the management company is authorised to act as an intermediary in these transactions.
How investment funds work
When we invest in a fund, we are actually buying a share of its portfolio (units). The price of each unit is known as the net asset value, which varies depending on the date we start investing.
Example: If we invest €1,000 in a fund with a net asset value of €200, we would receive 5 units.
The management company invests that money in shares and money-market or similar assets.
Among the advantages of an investment fund, we would highlight that you can choose both the amount of capital you want to put in and the time frame and level of risk, the variety of investment markets, and the diversification of risk. Some say you enjoy more tax advantages than when investing in the stock market, which I doubt: on the stock market you may pay more or less tax on your gains, but with funds you pay fees to third parties.
As for the disadvantages, we would point out once again that our money is managed by third parties who charge us a fee for it.
I once heard an expert investor say that he recommends investing in funds only when a person has no idea about the financial markets.
Many experts agree that if we decide to take on risk, it would be better to invest directly in the stock market, because we would have the same risk as in an investment fund, with the difference that on the stock market you get a higher return and save on fees.
Further reading
- What to invest in during the second half of 2010
- Investing in high-yield bonds
- What Arthur Rock analyses before investing in a company’s shares
- Investing in emerging markets
Featured image: Zarateman, CC0 1.0, via Wikimedia Commons.
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