April 9, 2020

How to Invest My Money in Investment Funds?

Indirect investments, that is, those in which an investor acquires a “collective investment vehicle” such as investment funds, represent a very large industry and with different types of funds that are increasingly sophisticated. So it is that when thinking about how to invest my money, the matter can become very thorny.

Initially, these products were very much in demand by conservative investors, who did not find adequate returns on deposits. In recent years this has changed a lot and the preferences of the fondest are very varied. Depending on our risk aversion and investment expectations, there is a wide variety of funds to invest.

WHERE CAN I INVEST MY MONEY?

The main premise, before deciding on what to invest and selecting any financial instrument, is to be clear about our profile as investors, our objectives and our level of risk.

There is such a large amount of financial products and in turn all with liquidity, risk, and profitability so unique that sometimes the investor is lost in the maze of markets.

This point is perfectly settled by investment funds, since there are so many types in the market, such as investor profiles.

WHY INVEST IN FUNDS?

The option to invest in funds is very attractive for all investment profiles, for several reasons:

Diversification

The first of these is undoubtedly the elimination of unsystematic risk (specific risk) through an adequate diversification of the portfolio.

Initially, Sharpe and later Markowitz developed portfolio management theories, in which the advantages of the diversification of values ​​are enunciated. Not only securities but diversification can also be given by different markets and even different currencies.

If an investor decided to properly distribute the assets of his portfolio, they would also require a very significant amount. In other words, the investment would not be as profitable. Thus, investment funds are most suitable for investments of an amount according to the average investor.

In this regard, it should be noted that the person interested in investing money in an investment fund should request the information leaflet. It sets out the objectives of the fund, as well as the guidelines that managers will follow.

Professional management

Any investor knows that the maintenance and adjustment of a portfolio require management. Without it, the portfolio will lose value. Portfolio adjustments are sometimes a cause of headache for investors who place their money through direct investments.

The truth is that it requires a certain level of technical knowledge as well as experience in the field. Although the investor enjoys this experience, he has limited time. The professional management offered by investment funds must be kept in mind.

The names of the managers appear in the information leaflet offered by the marketing entity of the fund itself.

The commissions charged for the management could be equivalent to the portfolio turnover expenses (commissions and other expenses) that would be applicable for the management of the same to an investor in other assets.

All portfolio management has costs, either directly or through a professional team. The costs of rotation and portfolio adjustment to an average investor can be very high when it comes to direct investments.

The maximum amounts of the commissions of the funds are established by Law and are variable to each type of fund. Also, commissions are deducted from the net asset value of the fund directly.

Taxation

The taxation of investment funds is also attractive. Possession of a non-tax fund, that is, until its reimbursement, there is nothing to pay to the Treasury. Being able to change investment funds freely and without paying taxes.

At the time of withdrawing the money invested in the fund, you obtain a capital gain or loss and are subject to withholdings on account of the IRPF, taxing as the taxable base of the savings. This does not vary from any other investment and savings product.

Thus, the advantages of this are obvious. In addition to the tax deferral, which involves the holding of an investment fund, a fund can rotate his money from one fund to another at times of greater or lesser market risk, without paying taxes.

WHAT INVESTMENT FUNDS CAN I INVEST IN?

As already mentioned, there are as many types of funds as investor profiles. When choosing one, we must bear in mind the joint risk-return factor. Since liquidity is usually given by itself. In the funds, there is no need to worry about the liquidity factor (unless it is one with special characteristics).

Given this great variety that exists in the market, it was necessary to establish cataloging so that selecting a fund would be easier.

Between 1999, the National Securities Market Commission (CNMV) and Invesco (Association of Collective Investment Institutions and Pension Funds) in 1999 designed a reference classification of funds.

So when choosing a fund to invest, it will be much easier to find the right one for our profile. The classification is carried out taking into account the investment vocation of the fund and provides information on the risk and return profile it will have. Now the question of how to invest my money? It has an easier answer.

The classification is extensive, but here we name the most common:

  • Asset Funds in the Money Market (the so-called FIAMM).
  • Short Term Fixed Income.
  • Long Term Fixed Income.
  • Mixed Fixed Income.
  • Mixed Variable Income.
  • Variable Income
  • International Variable Income Europe.
  • United States International Variable Income.
  • Japan International Variable Income.
  • Emerging International Variable Income.
  • Global Funds.
  • Guaranteed Fixed Income.
  • Guaranteed Variable Income.

In addition to these, there are the so-called “specialized funds”, they are not so conventional. Among them are index funds (indexed), fund of funds, funds that invest in unquoted securities, funds denominated in currency, listed funds (ETF, s) and free funds (hedge funds), etc.

Each type follows a different investment philosophy and when choosing what to invest, we must keep this classification in mind to know “where the fund moves”.

For your choice, questions such as:

  • What kind of asset?
  • What type of issuer?
  • Investment terms?
  • Market types?
  • Sectors?
  • Spot (or spot) or derivatives?
  • In what currencies?
  • Active or passive management?
  • Conventional or alternative management?

WHAT DO I HAVE TO KEEP IN MIND TO CHOOSE AN INVESTMENT FUND?

The option of choosing an investment fund, as a vehicle to direct our savings is a good decision, as long as we know the criteria that must be taken into account at the time of your choice.

For this, the investor who decides to enter this world has several information channels at his disposal.

Information leaflets published by the fund itself

In these documents, which must be published (and must be read by the investor), we must look at:

  • Objectives, guidelines, and investment policy.
  • Description of the fund portfolio (depending on the type of fund seen above).
  • Names of the managers.
  • Any other data of interest.

Reports on results of previous years

We must highlight a maximum that applies to the world of finance:

But they are certainly a sign of the quality of the work of the management team. Among them we must look at:

  • Annual rate composed of returns.
  • Level of risk and variation of this (fund volatility).
  • Fund launch date.

With this information at our disposal, the investor should keep in mind if the fund’s goals or objectives are consistent with its preferences. In addition to assessing how it operates in bull markets and weak markets, comparing with other similar funds.

Aspects such as sound management and fees charged should also be valued.

In summary, and returning to the initial question: how to invest my money in Investment Funds? In the beginning, you must determine the level of risk, your profitability objectives and ultimately your profile as an investor. In this regard, investment funds have much to offer when investing our savings.

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