Collective investment

They generally hold a large number of different investments and their overall performance depends upon changes in the value of these investments. Investment funds frequently measure their performance against a benchmark such as a stock market index.

Investing in a fund gives you access to a variety of securities and a range of economic sectors, markets, countries and currencies. This spreading or diversification of your investment reduces riskand over time can help smooth out the fluctuations in the value of individual, bonds, equities or other assets.

Investment funds are managed and monitored by teams of investment professionals. They offer a cost-effective way to benefit from capital growth and may pay income in the form of dividends or interest. They spread risk between different investment securities and reduce investment costs by sharing them between many investors.

While experienced investors may possess the knowledge needed to make their own investment choices, many people are happy to rely on the expertise of a fund manager.

 

Direct investment

Achieving diversification within a directly invested portfolio can be both expensive and time-consuming. Not so with an investment fund, as the costs in a fund are shared or spread among all its investors. While experienced investors may possess the knowledge needed to make their own investment choices, many people are happy to rely on the expertise of a fund manager.

Underlying assets

Some funds also invest in specialised instruments such asderivatives as part of their asset allocation. Other types of funds, which are not covered on this website may invest in other asset classes, such as real estate or private equity.

The investment objective of a fund is reflected in the types of assets it holds. Funds investing in equity generally offer higher potential returns, but also higher risks than some bond funds. Mixed funds (also known as « balanced funds”) invest in a combination of shares and fixed-income securities (e.g. bonds, money market instruments). The individual components are weighted according to the fund’s objective, the manager’s view of the market situation and the economic outlook. Traditionally, the financial assetsin which UCITS may invest are divided into three categories:

Money markets instruments

Money markets instruments are a type of short-term debt instruments issued by governments, banks or commercial companies to finance working capital. Investors often use money market funds as an alternative to bank deposits, because units or shares of money market funds can be bought or resold on a short-term basis and they frequently offer higher returns than bank interest rates. Like bonds, money market instruments also provide a fixed rate of interest and the original investment is repaid at the end of the term. Money market funds invest in money market instruments from a variety of issuers in order to achieve a broad diversification of their investments.

Bonds

Bonds, often known as “fixed income securities”, are issued by companies, banks or government authorities as a form of debt certificate. They are repayable at the end of a defined period, usually several years, and generally pay a fixed rate of interest. Another type, known as “zero-coupon bonds”, do not pay annual interest; instead the final redemption amount received by the investor is higher than the initial price they paid for the bond. So-called “floating-rate notes” pay a variable coupon, corresponding to a fixed margin or spread above a benchmark interest rate, which may move up and down depending on market conditions.

Bonds are often assessed by an independent rating agency according to the issuer’s creditworthiness or default risk. Bond investments are suited for investors who wish to receive a steady income. Moreover, unless the company or organisation that issued the bond defaults on its payments, the principal amount is repaid in full at maturity.

Many government bonds present virtually no interest rate or repayment risk. Bonds issued by many reputable companies are also considered to be very safe. Most of them pay a higher interest rate than government bonds because there is a higher risk that the issuer may be unable to meet interest payments or repay the original principal amount, i.e. default.

Generally bonds offer greater price stability than shares, although their price can also rise or fall according to changes in interest rates.

Equity

When a private company decides to list on a stock exchange, the ownership rights to the company are converted into shares that can be bought and sold on that stock exchange. A share represents a portion of the ownership of a public listed company, and collectively a company’s shares are known as its equity capital. The individual or institution that owns the share is known as the shareholder, and can receive income from its shares. Such income is called a “dividend”. The amount that is paid out as dividends depends on the profits earned by the company as well as its financial situation and capitalallocation.

The price of a share depends on supply and demand, which in turn are influenced by factors such as the profitability of the company, its long-term business prospects or the general sentiment of consumers and investors. Share prices will often fluctuate, sometimes for no apparent reason, and finding the right time to buy and sell shares is critical to the success of your investment.

Shares can be traded on financial markets, including regulated markets such as stock exchanges or, especially in the case of smaller companies, unregulated off-exchange markets. Shares can also be traded between institutional investors such as banks in private deals known as “over-the-counter” (OTC) trades.