BlogGuide to investing in investment funds
Nowadays, investment funds have become a very attractive option for those who wish to access the financial markets in an efficient and diversified way.
Below, we will analyse the different types of investment funds, their risks and the best practices to select the right funds through a webinar by Santa Pérez, asset manager at Talenta Gestión SGIIC. We will also address key concepts such as fixed income, short term, and help you make more informed decisions to manage your wealth.
In this article you can read a summary of the highlights of this webinar on investment funds, but if you want to access more exclusive content on this or other topics, visit ENAE Media where you can access all the videos of our teachers.
What are investment funds?
Investment funds are financial vehicles that pool the capital of different investors with the aim of investing in a wide range of financial assets. The main advantage of a fund is that it allows investors to diversify their portfolio without having to manage the assets individually. In addition, funds are managed by professional management companies that select assets according to the fund's strategy and investor profile.
The most common types of funds include equity funds, bond funds and mixed funds, each with different characteristics and levels of risk. For those seeking greater security, Euro fixed income funds are a more conservative option, while those seeking greater growth potential might opt for equity funds or thematic funds.
Types of investment funds
1. Equity funds
Equity funds invest mainly in shares of listed companies. They are considered riskier due to the inherent volatility of equity markets, but also offer greater potential for long-term returns. These funds are ideal for investors with a higher risk tolerance and a long investment time horizon.
2. Fixed income funds
Fixed income funds invest in bonds and other debt instruments issued by governments or companies. They are generally safer than equity funds, as bonds offer regular interest payments and repayment of the principal invested at maturity. However, they are not free of risk, such as interest rate risk or credit risk. In the short term, fixed income funds are often a conservative option for those seeking portfolio stability.
3. Mixed funds
Mixed funds combine fixed income and equity investments, seeking a balance between risk and return. They are a suitable option for investors with a moderate risk profile who wish to diversify their investment without taking on the full risk of the equity markets.
4. Index funds and passively managed funds
Index funds are a type of passively managed mutual fund that seeks to replicate the performance of a stock market index, such as the S&P 500 or the Ibex 35. Because they do not attempt to outperform the market, they tend to have lower fees than actively managed funds. They are an interesting option for those seeking a low-cost investment with exposure to global markets.
5. Thematic funds and absolute return
Thematic funds focus on specific sectors, such as technology, renewable energy or healthcare, while absolute return funds seek to generate positive returns regardless of market conditions. Both types can be used to diversify the portfolio with investments in specific sectors or strategies.
Risks associated with mutual funds
Although mutual funds offer professional management and diversification, they are not without risk. Some of the main risks you should consider when investing in funds include:
- Market risk: Fluctuation in the prices of the underlying assets can impact the value of the funds.
- Credit risk: In fixed income funds, there is the possibility that the issuer of the bond may not be able to meet interest payments or repay the principal.
- Interest rate risk: As interest rates rise, the value of bonds may decline, negatively affecting fixed income funds.
- Liquidity risk: In times of financial instability, some assets may become difficult to sell without incurring significant losses.
It is crucial to understand that past performance is no guarantee of future returns. Even if a fund has historically performed well, it does not ensure that it will continue to generate the same returns in the future.
The importance of selecting the right fund
Selecting the right fund is essential to achieving your financial goals. Here are some key factors to consider when choosing a mutual fund:
- Investor profile: Everyone has a different tolerance for risk, so it is essential that the fund you select fits your investor profile. If you are conservative, fixed income or short-term funds may be more suitable for you. On the other hand, if you have a higher risk tolerance, you might consider equity or thematic funds.
- Time horizon: The length of time you plan to hold the investment is another deciding factor. For short-term investments, fixed income and money market funds may be more appropriate. However, if you have a long-term horizon, equity funds may offer better returns.
- Fund performance: Reviewing the fund's performance and track record is important, but should not be the sole criterion for selection. Keep in mind that past performance is no guarantee of future results.
Costs and fees: Some funds may have high fees, which directly impact your returns. It is advisable to compare the fees of different funds, especially between actively managed and passively managed funds.
How does mutual fund management work?
Fund management can be of two types: active or passive. In active management, the fund manager makes strategic decisions to select assets that he or she believes will offer the best possible performance.
In passive management, on the other hand, the fund simply tracks a benchmark index, as may be the case with index funds. Depending on your risk tolerance and investment objectives, you may choose one or the other form of management.
Differences between saving and investing
Saving is the accumulation of money for short-term goals, generally deposited in bank accounts that offer a low return, but with very low risk. Investment, on the other hand, seeks to generate returns through financial assets that may include stocks, bonds or real estate, among others. While investment may offer higher returns, it also carries a higher risk.
For short-term goals, savings may be more appropriate, while for long-term growth, investment in mutual funds is a recommended option. National and international fund managers offer products for both savers and investors, facilitating access to a wide range of financial products.
Investment funds are a powerful tool for those seeking to diversify their capital and benefit from the knowledge of professional managers. From fixed income funds for the more conservative to thematic funds or absolute return funds for the more risky, there is a wide variety of options.
Make sure you analyse your investment profile, time horizon and risk tolerance before making a decision. Also, don't forget the importance of comparing costs and returns, and if necessary, consult a financial advisor for personalised recommendations.
