Mutual Funds: Is It Worth Investing?

Mutual Funds: Is It Worth Investing?


Low interest rates limited, for years, the return of more traditional investments, such as bank deposits, leading many investors to look for more attractive returns in exchange for some risk. Today, interest rates are already rising, but in a scenario of accelerated price growthwhich poses a great challenge to savers: find returns capable of counteracting the corrosive effect of inflation.

It is in this context that investment funds present themselves as a appealing solution for many investors. According to the most recent data from the Portuguese Association of Investment, Pension and Heritage Funds (APFIPP), subscriptions to investment funds in Portugal amounted to €271.6 million in August, while redemptions totaled €220.5 million. millions of euros. Thus, there was a positive balance of net subscriptions in the amount of 51.1 million eurosafter three consecutive months of decline.

But what, after all, are investment funds? What are the advantages and disadvantages compared to other instruments? Learn more in this article about this investment solution and its features.

Investment funds: types and characteristics

An investment fund is a financial instrument that results from the raising capital from various investors and which is managed by professional managers, which apply it to a series of assets. Basically, it is an autonomous heritage, created by the contribution of several parties, who entrust the management of their money to specialists.

In a simplified way, we can think of an investment fund as a “bag” in which several people put the amount they want to invest. This bag is then handed over to a professional manager, who invests the group’s money in a diversity of assets, which can range from stocks and bonds to real estate. Each person, on their own, might not be able to invest in such a vast array of assets, but as a group, and with a larger “pie”, they can benefit from exposure to a diversity of assets, sectors and geographies.

We find, no market, various types of investment fundsthat are distinguished precisely by the composition of the portfolios, that is, by the type of assets in which the money is invested. We thus have the securities investment funds, who invest primarily in assets such as stocks, bonds or other securities, and real estate investment fundswhich invest mainly in real estate.

At the same time, the funds are divided into open and closed. In open-end funds, investors can subscribe and redeem the portions that make up the fund (the so-called participation units) at any time, while in closed-end funds there is a pre-determined subscription period, and redemption only takes place with the fund liquidation.

Also read: 7 investment myths you can leave behind

profitability and risk

Most investment funds does not have guaranteed capital. That is, by investing, you are risking the loss of part or all of the money. On the other hand, associated with this risk is the possibility of obtaining very attractive returnsfar superior to other instruments that offer greater security.

Thus, the investor never knows, from the outset, what return he will get from his investment. If you have read in a brochure or campaign that a certain fund has a return of x%, be aware that this value refers to past performance or, in the case of a new fund, to a perspective, not constituting any guarantee of the return that will actually be achieved.

This is because the funds, due to the nature of the assets in which they are invested, are subject to market fluctuations and, therefore, to price fluctuations. And, of course, the greater the upside potential, the greater the level of risk.

Also read: Investment funds: Know some concepts before investing

Investor calculates the return on his investments using a calculator and graphs

Is it worth investing? Advantages and disadvantages

As we have seen, funds make it possible to comply with the golden rule of investment – the diversification – and earn potentially high returns, in exchange for some risk. We summarize below the main advantages and disadvantages of this solution in relation to other savings and investment alternatives:

Benefits:

– Diversification. Through a fund, investors achieve a degree of diversification of their assets that would be difficult to obtain with direct investment in assets. Likewise, you save on brokerage costs (compared to direct investment), also benefiting from the simplicity of the process.

– Professional management. The fund is managed by specialists with knowledge and experience in asset management, who will adapt the portfolio to the market context, enhancing profitability and protecting capital. The investor saves time and worries.

– Regime fiscal. Investment funds are subject to a tax regime that is, in many cases, more favourable, as is the case with investment in real estate, due to the tax exemptions they enjoy.

– Transparency. Before subscribing to an investment fund, investors have access to all the documentation on that instrument, which allows them to make a conscious and informed decision. All funds are required to publish documents with information on costs, risks, objectives and policy. of investments.

– Profitability. Investment funds can generate very high returns, well above those of more traditional instruments, as well as those of the assets that compose them, separately. However, as we have already seen, higher potential returns are accompanied by a higher level of risk.

Disadvantages:

– Commissions. In investment funds, various costs are involved, such as subscription fees, redemption fees and management fees. At this level, they compare poorly with other solutions that allow the same degree of diversification, such as ETFs.

– Scratchs. The investor is exposed to a number of risks, including market risk, capital risk, remuneration and liquidity risk. These instruments are therefore not advisable for more conservative investment profiles.

– “Voice” in management. From the moment he invests his money in an investment fund, the investor entrusts its management to a specialist and has no say in how it will be managed.

Read also: ETF: What they are and how they work as an investment option

What to consider before investing?

Before investing in a fund, it is important that you assess whether this instrument suits your needs. specific objectives and your investment profile. Being subject to capital risk, it is not advisable for more conservative investors with low risk tolerance.

On the other hand, you should be duly informed about the advantages and risks to which it will be exposed, consulting all available information, namely in the management regulation and in the prospectus.

If you still have doubts, ask the management company or depositary bank for more information and do not proceed without understanding the characteristics of the product.

On the CMVM website, you can learn about and compare the commissions and costs charged by the entities that sell investment funds and also use simulators to understand which entity practices the most competitive rate in the subscription of a given fund.

Also read: What is your investor profile?

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