Investment funds are the most common investment vehicles, accessible in traditional banks as well as in some online brokers.
With an investment fund, you invest in a single transaction on several financial assets, which allows you to diversify the risk, and to invest without complications.
In this guide, we'll explain everything you need to know about different types of funds, how to invest in an investment fund, and the best ways to do it.
Investment funds, also known as investment funds, are baskets of securities, manually selected by a management company, or selected for the purpose of replicating a benchmark.
These funds work in timeshare: when you invest in a fund, you buy a title that corresponds to a share of a basket of stocks or bonds already selected and actively managed.
Investing in an investment fund therefore allows you to respect one of the most important rules of investment: diversification.
Funds can take several legal forms (Variable Capital Investment Company, Common Investment Fund, ETF).
Three main types of funds can also be identified: passively managed investment funds, actively managed investment funds and hedge funds.
Investment funds are therefore baskets of shares, selected according to various criteria. However, there are two categories of investment funds: conventional funds and exchange-traded funds, also known as ETFs, or ETFs in some countries.
Conventional investment funds display only one listing per day, the evening after closing, to update the value of a share. The price on the one hand is called "net asset value."
The operation is different with publicly traded investment funds, which are real-time investment funds that can be traded exactly as if to invest in stocks.
However, for both traditional investment funds and publicly traded investment funds, the outlook for gains is similar, consisting of capital gains and dividend gains, when it comes to investment funds containing dividend-paying stocks.
Fund Return - Capital Gains - Dividend Yield
Let's take the example of an investment in a fund with yields, which vary little in capital but pay attractive dividends. In our hypothesis, we will take into account an investment of 10,000 euros for 1 year. Over this period, the fund increased by 1%, but the dividends represented a return of 5%. In total, the return on the investment fund will therefore be:
Total Fund Return - 1% - 5% - 6%
For an investment of 10,000 euros, this represents a gain of 600 euros, compared to the gain of less than 50 euros that you would have received with the near-zero return of conventional investments type Book A.
The easiest way to invest in an investment fund is to do so through a publicly traded investment fund through an online broker.
CopyPortfolio All-Equity Investment Fund
If you want to diversify into the stocks of all the major indices, this portfolio may be for you. It invests in the biggest stocks of the world's largest indexes, including the Dow Jones 30, the S-P 500, the Nasdaq 100, the China 50, the DAX30, the Euro Stoxx 50, the AUS 200 and more.
CopyPortfolio Gold and Energy Investment Fund
Do you think it's time to go back to gold and energy? Invest in commodities with this investment fund, which contains publicly traded investment funds from the energy sector and CFDs on equities and commodities. The portfolio invests in the following publicly-traded investment funds: US Natural Gas (UNG), US Oil (USO), SPDR Gold (GLD), Energy Select Sector SPDR (XLE), Junior Gold Miners (GDXJ) and Gold Miners (GDX), etc.
Crypto-currencies investment fund
This fund allows you to invest in Bitcoin and ethereum, the two largest cryptocurrencies. The risk score is 7 due to the volatility of the cryptocurrency market.
Crypto CopyPortfolio Investment Fund
Unlike the previous one that focuses on BTC and ETH, this investment fund is invested in all cryptocurrencies traded on, namely Bitcoin, Dash, Ethereum, Ethereum Classic, Litecoin and Ripple. The initial allocations of the co-portfolio gave Bitcoin about 50%, Ethereum about 25% and the other cryptocurrencies about 5% each.
Food and Beverage Investment Fund
This investment fund is designed to experience a stronger cycle in the event of economic weakness when basic consumer goods are a reliable fallback solution. Invest in McDonald's, Starbucks, Coca-Cola, General Mills, Dean Foods, etc.
Travel and Leisure Investment Fund
Traders may want to enter the travel and leisure market, one of the sectors that has fallen the most in the face of the pandemic, and therefore one of those that could bounce back the most with the return to normal. The portfolio includes hotels, airlines, booking agencies, credit card companies and high-end purchases.
Investment funds offer a wide range of options, given the multitude of different types of investment funds. Below are more explanations on the main types of investment funds.
Most Investment Funds follow indices or equity sectors. Some index investment funds mimic an index in its entirety, and others use a representative sampling, which deviates slightly using futures, option contracts and swaps, and the purchase of shares that are sometimes not found in the index. If this sampling becomes too aggressive, it can lead to tracking errors. Any investment fund with a performance gap of more than 2% is considered to be actively managed.
There are a multitude of different equity funds, specialized geographically or by sector, or by size of the capitalization of the companies included in the fund.
SPDR S-P 500
Utilities Select Sector SPDR
Healthcare select sector SPDR
Financial Select Sectro SPDR
iShare Core NSCI EAFE
As with equity funds, there are many bond funds. The principle is the same: Instead of investing on a single bond, you invest in a basket of bonds, which diversifies the risk. Note that with bond funds, it is mainly the dividend yield that counts, the change in capital being secondary.
20th Year Treasury Bond Ishare
Pimco Total Return Active EX
Vanguard Total Bond Market
iShares TIPS Bond
iShares Emerging Markets Local Government Bond UCITS
Historically, commodities have had a low price correlation with equities. According to experts, strategic asset allocation accounts for 90% of a portfolio's return. However, it is not enough to have stocks, bonds, cash, commodities and real estate in your portfolio. You also need to diversify your portfolio into each of these asset classes.
That is where the investment funds come in. Investors can buy a commodity investment fund that tracks changes in the prices of particular commodities that allows them to invest in gold or oil, or a commodity equity investment fund that invests in the common shares of commodity producers.
The former is not very correlated with equities, while the latter is strongly correlated. If your portfolio already contains stocks, a pure commodity investment fund is probably the best choice.
Some examples of commodity investment funds:
Investors looking for diversification may also consider using real estate investment funds. Whether you choose a fund that invests in a specific type of real estate or a larger fund, the greatest attraction of these funds is that they must pay 90% of their taxable income to shareholders. This makes them extremely attractive in terms of yield, despite the increased volatility compared to bonds. These funds are an excellent source of income, especially when short-term interest rates and inflation are close to their historically low levels.
Some examples of real estate investment funds:
As investment funds became more popular, a variety of funds emerged to meet every investment strategy imaginable. Two of the most attractive are reverse funds, which take advantage of the poor performance of a particular index, and leveraged funds, which can double or triple the returns of a particular index using leverage, as the name suggests. You can even buy investment funds that do both. If you decide to go into leveraged or reverse investment funds, it is important that you understand the risks. In general, they are extremely volatile and unreliable as long-term investments.
A fund of funds is an investment fund that invests in other funds. To invest, the manager of such a fund selects funds that are sufficiently diversified, perform well and have a low risk profile. Because funds of funds of funds invest on a large scale, they sometimes benefit from lower prices and greater access to funds that are not available to individual investors.
The Ethical Fund is a type of fund that makes investments in companies that respect social or environmental criteria. This type of fund includes several categories of mutual funds: the socially responsible investment fund and the solidarity fund. The peculiarity of the ethical fund is that it chooses the companies were to make the investments, not only according to their financial performance but also according to ethical criteria such as the environmental and social aspects. In addition, ethical funds often commit to paying part of their commissions to humanitarian or environmental works.
Let's now look at investing in traditional investment funds, which are not offered by online brokers.
Step 1: Choose your intermediary
All the commercial banks you are used to in countries offer investment funds or investment funds. So you can turn to your usual bank, which will introduce you to its in-house investment funds. The downside is that the choice will most often be limited to funds issued by the bank itself.
You can also turn to an investment fund broker. Boursorama or Cortal Consors, for example, offer their clients a very wide selection of investment funds from a multitude of issuers.
Finally, there are also companies whose objective is to manage investment funds: management companies. It is also possible to turn directly to the management company that issues a fund to buy shares in that fund.
Step 2: Open an account
If you invest in your traditional bank or directly with the issuer, you will not normally need to open a specialized account. On the other hand, if you choose the option of an investment fund broker, you will need to open an online account using a procedure similar to most online brokers.
Step 3: Select which investment fund or funds to invest in
If you turn to your bank or a management company, you will need to rely on their recommendations and advice. But if you turn to an online investment fund broker, you'll have access to advanced fund sorting and selection tools that will help you choose the investment funds that are best for you.
There are many legal forms of investment funds in Europe: SICAV, OPCVM, FCP, FCPE, FCPI, FPCI, FCPR, FIP, FIA, FIPS, SCPC, SCPI, OPCI, SOFICA.
Below are more details on the most common legal forms.
The Real Estate Securities Collective Investment Organization (OPCVM) brings together all the funds that allow you to invest in the markets. Investors place their money in financial and monetary markets in order to obtain a return in capital and/or dividends. There are two types of UCITS, namely SICAV and FCP. The difference between the two lies mainly in the legal status.
The capital of SICAV companies varies. Nevertheless, the starting sum must be significant. The interest of SICAV is in the diversification of investments which gives it a more secure appearance than if you had invested in a single real estate value.
The Common Investment Fund is, as the name suggests, a pooling of money invested in the markets. This allows you to start with little money and then diversify your investments. The FCP then buys, manages and sells all the securities. CPF investors are referred to as "security holders" and each hold a share of the mutual fund.
Established in 1997, the FCPI (Common Innovation Investment Fund) allows investors to invest in innovative companies. The main benefit is a tax reduction and an income tax reduction of 18% of the amount invested. Beware, this is an investment in unlisted companies, most often with SMEs. The latter must be innovative European companies under the age of 10, which respect certain constraints. So it's a pretty risky investment.
The FPCI (Professional Capital Investment Fund) allows investment in unlisted companies at a minimum of 50%. FPCI are considered "private equity" products. FPCI is reserved for professional investors wishing to invest more than 100,000 euros.
Exchange-traded funds (ETFs)
Publicly traded investment funds are continuously listed passive investment funds. That is, they can trade in real time during trading hours, not just on the daily net asset value phase, as on traditional investment funds. The initial investment required is often much lower than for conventional funds. Note that brokers usually offer a very wide selection of ETFs, in pus from its own investment funds.
Investment Fund Choice
In this section, we will detail the criteria to consider when comparing investment funds and choosing the ones that are best for you.
The list below is not exhaustive, but it is a good starting point for the various sorting criteria. If you have an account with an online broker, they may offer you additional options.
The most popular investments - equities and bonds - dominate the holdings of publicly traded or conventional investment funds. But some funds are made up of commodities, currencies or alternative investments, among other types of assets. Other publicly traded investment funds hold a combination of these assets.
Some publicly traded investment funds hold global investments. Others focus on specific regions - developed or emerging markets, among others, countries and even individual states.
It is a way of classifying the assets that make up the assets of a publicly traded investment fund. For equity-based funds, think about the size of the company (large, medium, small, or micro capitalisation) or industry (such as technology, energy, or financial companies). For publicly traded or traditional fixed-income investment funds, consider corporate bonds - including high-yield and investment-grade bonds - municipal or government.
Publicly traded investment funds can be a useful way to express a specific investment strategy. This includes aligning investments with your values, investing in growth or value-oriented funds that find the fastest-growing or undervalued stocks.
Not all publicly traded investment funds are cheap. Annual administrative expenses - known as a expense ratio - were 0.52 per cent for the average equity index ETF and 0.31 per cent for the average index bond ETF in 2016, according to data from the Investment Company Institute. Fees are higher on traditional investment funds, sometimes in the order of 5%.
But of course, it will be necessary to take into account the past performance of the investment fund, although past performance is by no means a guarantee of future performance.
As mentioned earlier, there are actively managed investment funds and passively managed investment funds. There is also a third category, hedge funds, which are much riskier. Find in this section more details on these different styles of investment fund management.
Passive-managed funds (or index funds)
Passively managed funds aim to replicate the evolution of a benchmark index, which can be based on a region, country, sector, theme or other. Managers focus on the security of the investment and purchase securities that make up a stock market index. For example, in Europe, the main stock index is the CAC 40, which brings together the country's 40 largest stocks. Depending on the evolution of the index chosen, managers vary the composition of the portfolio. The level of risk is the same as that of the market they replicate. It should be noted that all continuously traded funds (ETFs) are passively managed funds.
Actively managed funds
Actively managed funds are discretionary, i.e. fund managers decide for themselves what shares to include in the fund. Managers generally seek to exceed a benchmark, and monitor the economic environment and modify their fund's assets as the market environment evolves. To get maximum capital gains, they will buy and resell in large quantities. The level of risk will depend here on the allocation of the portfolio. Note that actively managed funds generally follow a risk profile (low, moderate or risky), on which their asset allocation depends. For example, a risky fund will be heavily invested in equities, but with little in bonds, and vice versa for a low-risk fund, which will focus more on bonds and other fixed income securities.
Hedge funds, or Hedge Funds
Also known as hedge funds, hedge funds are risky investments. Managers seek maximum profitability and use a variety of unauthorized financial instruments for more traditional investment funds. These include short selling and using leverage. Investing in hedge funds can be an attractive source of diversification, but there is little recommendation to spend too much of your total portfolio on them.
ETFs and investment funds: Similarities
The greatest similarity between etfes (exchange-traded funds) and mutual funds is that they both represent collections, or "baskets," of individual stocks or bonds managed by professionals.
Both publicly traded investment funds and mutual funds have integrated diversification.
A fund can include tens, hundreds or even thousands of individual stocks or bonds in a single fund. Thus, if one stock or bond is not doing well, there is a chance that another will be doing well. This can help you reduce your overall risk and losses.
A wide range of options available
Publicly traded investment funds and investment funds both give you access to a wide variety of stocks and bonds. You can invest widely (for example, a total market fund) or close (for example, a high-dividend equity fund or a sector fund) - or anywhere in between. It all depends on your personal goals and your investment style.
Managed by experts
Publicly traded investment funds and mutual funds are managed by experts. These experts select and monitor the stocks or bonds in which the funds invest, saving you time and effort. While most publicly traded investment funds - and many investment funds - are index funds, portfolio managers are always there to ensure that funds do not deviate from their target indices.
ETF and Investment Fund: The Differences
While there are some similarities between ETFs and traditional investment funds, there are also notable differences, often to the advantage of publicly traded investment funds.
The minimum investment to buy a share is very often lower on ETFs. It is not uncommon to be able to invest only $50 in a publicly traded investment fund, when it is not uncommon for a share of a traditional investment fund to display a price of several thousand euros. By heading to exchange-traded funds (ETFs), you will be able to invest in several publicly traded investment funds with a small capital, thus maximizing diversification.
Opportunity for short-term trading
Traditional investment funds show their valuation once a day, while publicly traded investment funds are listed in real time, like stocks. It is therefore possible to buy a publicly traded investment fund, and resell it a few hours later to take advantage of its intra-daily variations, as in day-trading on stocks. This is not possible on conventional investment funds, especially since higher fees involve a longer-term investment.
Fees are much higher on conventional funds than on publicly traded investment funds. Indeed, some conventional funds charge up to 5% of the entry fee, while it is not uncommon to see publicly traded investment funds with fees well below 1%. It is also for this reason that it is possible to practice short-term trading with exchange-traded funds, but not with conventional investment funds.
Access to complex strategies
There are exchange-traded funds that allow you to bet downwards on indices, or to benefit from leverage, or both combined. This allows you to find publicly traded investment funds that are suitable for all market situations. Traditional investment funds, on the other hand, cannot bet downwards or by using leverage.
All publicly traded investment funds follow more or less specialized indices, but there are no ETFs that rely on the decisions of their managers. On the other hand, some discretionary active management funds rely primarily on the choices of their manager, sometimes elevated to the rank of star. This is not possible on publicly traded investment funds. On the other hand, some broker services offer a similar alternative, allowing you to replicate the positions of certain traders, and even to build trader funds, or even the transactions of several managers that you have scrupulously selected.
Benefits of investment funds
In this section, let's summarize the main benefits of investment funds.
A publicly traded investment fund or investment fund (ETF) can give exposure to a group of stocks, market segments or styles. A publicly traded investment fund or a conventional fund can track a wider range of stocks, or even attempt to emulate the returns of a country or group of countries.
Easy to negotiate
For exchange-traded funds, the operation is as simple as for equities. In addition, publicly traded investment funds can be purchased on margin and sold short. ETFs trade at a price that is continuously updated. Moreover, since ETFs are managed funds, there is no need to learn trading to trade them.
Exchange-traded investment funds, which are passively managed, have much lower spending ratios than actively managed funds, which mutual funds tend to be. What increases a mutual fund's spending ratio? Costs such as management fees, fund-level shareholder accounting fees, service charges such as marketing, board payment, and sales and distribution fees. However, even with conventional funds, this is still a much cheaper method of investing than buying several shares individually to set up your own investment fund.
Access to dividends
Investment funds and ETFs also qualify for dividends from the shares that make up these funds. These dividends can be reinvested automatically or paid in cash.
Investment fund risks
After reviewing the benefits of investment funds, let's move on to the disadvantages.
Investing in funds reduces risk through diversification. But that says reduced risk, also says reduced yield. For example, an investor who chooses to bet on one or two shares will have the opportunity to see them double in value in a few months. This is much less likely in an investment fund where the performance of rising shares is moderated by declining stock losses.
Lower dividend yields
There are publicly traded investment funds that pay dividends, but returns may not be as high as if you owned a stock or a group of high-yield stocks. The risks associated with holding ETFs are generally lower, in part because of fees, but if an investor can assume the risk, the dividend yields of the shares can be much higher.
Yields on leveraged ETFs are skewed
A leveraged publicly traded investment fund is a fund that uses financial derivatives and debt to boost the returns of an underlying index. Some publicly traded investment funds with double or triple leverage may lose more than double or triple the index tracked. These types of speculative investments need to be carefully evaluated. If the ETF is held for a long period of time, the actual loss can multiply rapidly.
Investment fund, for whom?
The offer in terms of investment funds is very diverse, and it is therefore a financial instrument that suits all profiles of traders. The funds are suitable for beginners, who can buy diversified portfolios in one transaction instead of taking the risk of choosing the stocks to invest in themselves. Experienced traders will also be interested in diversification, in order to complete their riskier trading operations on other instruments.
Investment funds are also suitable for short-term traders, thanks to continuously traded funds (ETFs), as well as long-term traders, who will be able to choose an index fund to replicate the performance of an index over many years. It is a method that statistically allows you to achieve a positive return for sure, if the investment horizon is 10 years or more.
Investment funds can provide two types of gains: capital and distribution.
Capital gains come from the profit you could make by reselling your shares in the fund. Note that it is also possible to suffer a capital loss.
Distribution gains come from dividends, interest, capital gains and various other income generated by the investment fund. These gains may be affected in cash or reinvested in the fund.
To make money with an investment fund, you will need to know if you want to focus on income, which is safer but offers a lower return, or to focus on capital gains, which can be very large, with the consideration of a loss risk also significant.
Conclusion: Should we invest in an investment fund in 2020?
While the most obvious advantage of investment funds is diversification, they have other key advantages, whether for beginner traders or seasoned investors, for short- or long-term time horizons.
The legal forms of different investment funds are diverse, but we have seen in this guide that exchange-traded funds, also known as publicly traded investment funds, or ETFs, are by far the most convenient and the most advantage-like.
Frequently Asked Questions
A Chinese proverb says that the best time to plant a tree was 20 years ago. The second best moment is now. There is no reason to delay investments, as the long term is statistically the most profitable strategy in the markets.
There is a very wide diversity of investment funds: equities, bonds, commodities, cryptocurrencies or mixed funds.
Risks come in many forms. For example, if you own a share of a company, there is a price or market risk or company-specific risk. The action of this one company can decrease or even collapse. Investment funds help to address this risk through diversification.
Each investment carries a risk, only its nature and degree vary. The same is true for investment funds. Not all mutual funds present the same risk in terms of return on investment. Some are very low risk, with low yields, while others are bolder, with the possibility of impressive gains.
Once an investor has decided to invest in mutual funds, he must choose the fund in which he will invest. To do this, many criteria will have to be taken into account, which we detail in this guide.