For and against investment funds

Investment funds are very popular with investors because they offer several advantages. In addition to professional management by seasoned portfolio managers, they are also very diverse and diverse. They allow investors to invest in various economic sectors and different types of securities, which helps to modulate the overall risk and to choose the investment product that best fits their objectives. They also allow small investors to reach markets that are not easily accessible to them, especially foreign markets.

Flexible, you can transfer your investments to other funds belonging to the same family and having the same fee structure. It is also possible to make systematic investments or withdrawals. Finally, mutual funds can be bought or sold easily, which can give access to cash, since one can convert at any time its shares in cash.

One of the main drawbacks of mutual funds is their management fees, which can range from 1.45% to 5.50%, even though these fees have been declining in recent years.

It should be noted that the management fee depends on a number of factors, including the type of fund: a stock fund is more expensive to manage because it requires a lot of analysis from the manager. The management style of the latter also has an impact on fees, such as active management, which aims to outperform market performance or, conversely, passive management, which simply seeks to replicate the performance of the latter. this. An active manager will sell and buy securities more often, which will necessarily have an upward impact on fees. With passive management, there will be far fewer transactions, so less fees.

One of the main drawbacks of mutual funds is their management fees, which can range from 1.45% to 5.50%, even though these fees have been declining in recent years.

When you buy units of a fund, you must consider the management expense ratio (MER). This ratio represents the percentage that will be deducted directly from the net return of your funds and tells you what it costs to administer the fund. Thus, the higher the ratio, the lower your return will be. You can get all the details on the various fees related to each fund by consulting their prospectus.

Advantages

Over the past two decades, mutual funds have become very popular because of the following benefits:

  1. Diversification – A mutual fund can by itself hold much more securities than most independent investors could otherwise afford, which helps to spread risk and reduce the effects of market volatility on returns.
  2. Professional management – Money in a mutual fund is managed by specialists who make day-to-day investment decisions based on extensive research, sophisticated software, market information, and their own experience.
  3. Choice – Given the wide variety of mutual funds, investors have the flexibility to find the ones that best meet their investment objectives.
  4. Liquidity – Mutual fund units can usually be bought and sold every business day, so investors can easily access their money.
  5. Flexibility – Investors can easily transfer money from one fund to another as their investment needs and goals change.

Features: Understanding the basics

Mutual funds can provide two kinds of gains: in capital and in distribution. Capital gains arise from the profit you could realize by selling your units of the fund. Conversely, you could also suffer a capital loss.
Distributions are earned on dividends, interest, capital gains and other miscellaneous income generated by the mutual fund.
These gains may be affected in cash or reinvested in the fund.
In the area of taxation, specific rules apply to mutual funds. In general, the sale of units results in a capital gain or loss, which may be taxed or tax deductible, depending on the tax laws in effect.
Each investor can therefore find a shoe to his feet and make the best investment choice taking into account his risk tolerance and his investor profile.

The price of a unit (FCP) or unit (SICAV) of an open-ended investment fund is determined by the value of its assets, which is measured by the net asset value (NAV). The NAV is the equivalent of the market value of the assets of the fund less liabilities such as expenses or other debts. This figure is then divided by the number of units or units in the fund that have been issued to investors.

For example, if the value of the assets of a fund is 100 million euros and that of its commitments of 5 million euros, its net assets amount to 95 million euros. If investors hold 10 million units or units, the NAV per share or unit is 9.5 euros. This is the price at which Units or Units may be purchased from or sold to the Fund, minus (if sold) or increased (if purchased) applicable fees and commissions.

Investors must pay various fees and expenses when buying and selling units of an investment fund. The latter is also subject to various fees that are paid from the assets he holds. Investing in a fund typically involves upfront fees of up to 8% of the value of the investment made. This increase is generally not held by the fund company, but is used to cover the costs of distribution services such as commissions paid to fund distributors such as banks and other financial advisors. Some funds also charge a fee when units of the fund are sold or redeemed, especially if they have been held for a very short period of time.

The ongoing costs that are charged to the investment fund are generally measured by its Total Expense Ratio or TER, which includes the fees paid to the Fund Manager for investment decisions and management, as well as other costs related to the operation of the fund. These include custody of assets by the fund’s custodian, calculation of the net asset value, legal fees, audit services and marketing expenses.

A significant component of the investment fund’s costs is the fees received by the manager that depend on the complexity of the fund’s investment strategy. This means that the TER of actively managed funds can be up to 4% or more for exotic or highly specialized funds. On the other hand, the TER of a passive fund whose objective is to replicate a specific index is generally less than 2%.

Information about an investment fund can be found in different sources, the three main ones being the prospectus, its half-yearly or annual financial report and the marketing documentation (including the fund manager’s website). While each of these sources aims to inform investors of the characteristics of the fund, they present different types of data and in a different form. It is important to read as much information as possible and review it with your financial advisor before making your investment choice.

The prospectus is the key document of the investment fund. It provides comprehensive details on the operation of the fund and a thorough risk assessment. The prospectus is an important document, but it can also be intimidating. The information it contains is often confusingly complex with an abundance of hard-to-understand jargon, so investors need an investment advisor.

Until June 2011, UCITS were also required to prepare a “simplified prospectus” providing a summary of the main prospectus. However, this document did not prove as user-friendly as originally intended. To replace it, the UCITS IV Directive requires fund managers to publish a Key Investor Information Document (KIID), often referred to as KIID, KII or KID, according to its English name. The latter consists of a concise but exhaustive overview of the fund’s main features, written in plain language and published in a standard format. Most of the time, it is on two A4 pages, although a three-page variant exists for structured funds.

Discover the OPC, SICAV, FCP
Discover the profiled Funds