An investment fund is often described as a basket of shares (or other financial products). When you participate in an investment fund, an investment fund manager invests your money for you. They will analyse the stock market and buy or sell for the fund, based on the outcome of their research. This also marks the difference between ETFs and investment funds. Typically, an ETF is set to track an underlying such as an index. Usually, they are not actively managed by a fund manager. Funds can invest within a theme, such as emerging markets, or for example, the fund can have a focus on a specific geographical region. A combination of different investment categories is also possible.
Investment funds have stocks, bonds or other financial products of several companies in its portfolio. So, if you participate in such a fund, you automatically invest in several companies at the same time. The advantage of a large spread is in regard to diversification. When one stock has a disappointing return, this has a limited influence on the return achieved by the complete fund. On the other hand, positive outliers can also have a limited influence on the overall result.
The fund manager determines the composition of the fund. He or she determines which shares to invest in. As an investor (or participant of the fund), you have no influence on the composition yourself. In the European Union, it is a legal requirement for a fund manager to provide a Key Investor Information Document (KIID) for UCITS funds. For non-UCITS funds, a Key Investor Document (KID) is required according to the PRIIPs regulation. This information is often available on the website of the relevant fund and in our trading platform. The document describes the most important information, such as the composition of the fund, the costs, the past performance and the distribution percentages. It can be essential to make a well-considered decision when choosing an investment fund. Sometimes, for example, a minimum investment is required to join an investment fund. If this applies, it is clearly stated on its website.
Investment funds can be open-ended and closed-ended. Typical for an open-end fund is that the fund manager is only allowed to expand the basket of shares when new money arrives. Open-end funds always note the Net Asset Value (NAV). The price of an open-end fund depends on this NAV. The vast majority of investment funds are open-ended. This means that they can create more shares when desired. In contrast, the number of shares is fixed for closed-end investment funds. The price of a closed-end fund is determined by the supply and demand in the fund. When placing an order for a closed-end investment fund, it is important to determine in advance how much you are willing to pay or wish to receive. A limit can be specified if desired.
Investment funds are typically actively managed by a fund manager, which comes at a price. These costs are included in the price of the investment fund. Most of them charge between 0.5%-2.0% on an annual basis. It is important to check this before investing, as ongoing charges can impact returns on investment. The exact costs are stated in the KIID or KID and the Prospectus. You can find these documents within the DEGIRO platform when you select an investment fund and then select ‘Documents’. In addition to the intrinsic costs, your broker charges transaction costs for the purchase and sale of your position. Please see DEGIRO’s fees in our Fee Schedule.
There are many different types of investment funds. Some of the main ones are equity funds, bond funds, mix funds, hedge funds and index funds. Below are short explanations per type of fund, so that you can compare the various types.
Participating in an investment fund can be beneficial, but it is not without risk. At DEGIRO, we are open and transparent about the risks associated with investing. When an investment fund is well spread, the risk is often relatively limited. However, investing always involves risks. Please note that most investment funds are not traded often. For most funds, this is once a day, but some funds trade once a week, once a month or even less. Oftentimes, your order must be given a day in advance for a certain time to be taken at the next day's trading time. The time at which your order must be placed depends on your broker. You can find the exact time when trading the fund can be found in the Fund's KIID.
While a higher risk investment fund may have the potential of a higher return, there is no guarantee of this. The higher the risk associated with a particular fund, the higher the risk is of losing your investment.
Please note that most investment funds are not traded often. For most funds, this is once a day, but some funds trade once a week, once a month or even less. Oftentimes, your order must be given a day in advance for a certain time to be taken at the next day's trading time. The time at which your order must be placed depends on your broker. You can find the exact time when trading the fund can be found in the Fund's KIID or KID.
In both the prospectus and KID or KIID you can also find information about the risk of a specific fund. The risk indicator in the KID or KIID rates the risk of a fund between one and seven. Within this ranking, one is the lowest risk level and seven is the highest. There are different methods that are used to calculate the risk indicator.
In addition to the risks mentioned above, there are certainly other factors that can affect the performance of investment funds. Here are some of them:
Market risk: It may occur that you invest in a market that may decrease in value. This happens the moment you expose the fund to a single market. In this case, volatility can also be higher.
Emerging markets risks: When the fund is invested in an emerging market, factors such as the political or economic situation may impact its performance, either positively or negatively.
Diversification risk: As we know, diversification is the key to any investment. If you invest in a single asset, you risk that if it doesn’t perform well, you will have greater losses.
Liquidity risk: This risk concerns the fact that some positions may not be liquidated in a reasonable amount of time. It’s mainly related to two factors:
DEGIRO offers funds from many different fund houses. Some well-known fund houses are:
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.
Investing involves risks. You can lose (a part of) your invested funds. We advise you to only invest in financial products which match your knowledge and experience. This is not investment advice.
Investing places your capital at risk. Read our full warning here.
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