Financial literacy: everything about funds

Investment funds – in a nutshell

Financial security for the future is important. Equities, bonds, currencies, commodities – a myriad of markets are available for investment. But what’s the best way to invest in these markets? For a private individual who doesn’t have in-depth knowledge of securities, this can be a daunting question. Whether you’re interested in savings for retirement, a long-term investment in the bond markets or a more risky investment in the equity markets: Investment funds are a good way to enter the financial markets, provided that you are aware of the risks, which mainly involve the risk associated with changes in prices. Fundamentally speaking, with funds an investment can be made using small amounts, because it is possible to invest small sums on a regular basis (for example, monthly).

• In an investment fund, the capital of many investors is pooled in so-called “fund assets”. Instead of investing individually, these investors invest their money collectively.

• The fund assets are divided into fund units of equal value. Depending on the amount of their investment, the fund’s investors own a corresponding portion of the fund assets.

• These pooled fund assets are invested for the fund, each of which has fund rules that precisely regulate what asset classes (equities, bonds, etc.) can be invested in. For instance, a European equity fund cannot invest in bonds or in US equities.

• What kinds of funds are there?

• Investors cannot influence the composition of the securities held by the fund or the management of the fund.

• The value of the fund assets (the “net asset value”) is calculated regularly (usually each trading day), based on the prices of the securities held in the fund.

• Investment of the fund assets occurs in accordance with risk diversification principles. This means that the invested capital is not just invested in a single equity or bond: It is invested in various different securities, sectors, and countries (depending on the fund rules).

• The two investment styles: Active management refers to an investment strategy in which the focus is placed on the active management of the investment fund. The targeted selection of issuers and asset classes is intended to generate additional value for the investors. Passive management refers to an investment strategy in which the portfolio management seeks to replicate the performance of a financial index.

• Fund units can be purchased or sold at any time (on banking days), unless calculation of the fund price has been suspended. Usually, there is no minimum holding period or cancellation period, but it is important to keep in mind a reasonable minimum holding period. In general, the number of fund units is not limited.

• Just like equities and bonds, funds are securities whose prices fluctuate. They thus involve general market risk. There is no guarantee of a return. Capital losses may be incurred with a fund.

• Even though it is possible that an individual fund has generated steadily positive performance in recent years, past performance is not a reliable indicator of future development. Thus, past performance is not a fixed figure, like the interest rate on a savings account.

• Your bank/financial institution: While several parties are involved in investing with funds, when you’re the investor, your fanancial advisor functions as your main direct contact. They tell you about the opportunities and risks of investment funds, advise you, and help you to find the investment strategy and funds that meet your needs. Once you decide for one or more funds, purchases of fund units are handled by your bank. A securities account is opened for you, and if necessary a securities settlement account. The payment amount is transferred directly from your account. You will receive regular information on the development of your fund investment (e.g. portfolio statements) from your bank. Interested in changing your investment strategy? Your Raiffeisen advisor is still your main point of contact for questions about your fund investment.

• The custodian bank: The job of the custodian bank is to safeguard the fund assets. It performs the following accounting and settlement functions: ensuring the proper accounting of processes involving the fund assets (expenses, proceeds, inpayment, and outpayments) and handling all necessary payments.

• The asset management company: One of the basic principles of investment funds is that safekeeping (custodian bank) is separated from the management of the fund assets, in order to avoid conflicts of interest. Management is the responsibility of the asset management company, which invests in accordance with risk management principles.

• The fund management: Actively controlled investment funds are managed by professionals. The fund management is responsible for the fund’s investments. Based on comprehensive market and company analyses, and depending on the market situation, the fund management invests the fund assets in a targeted manner, but always within the framework of the fund rules. Nevertheless, the risks associated with an investment in securities, including loss of capital, are still present.

Every investment needs time to fully develop its strength. Regardless of whether it takes the form of one-time or regular payments, it’s important to understand investing in investment funds as a medium- to long-term process. As a rule of thumb: the higher the price volatility of an investment, the longer the investment period should be. Preparing for one’s financial future should be an important topic for everyone. 10, 20, 40 years: Knowing when you want to take certain steps in your life can have a huge impact on your investments and accumulation of capital. With long-term accumulation of capital, three factors come to the fore: the compound interest effect, the cost averaging effect, and the diversification of risk, keeping in mind that loss of capital cannot be ruled out.

A rich array of investment funds is available. Your own personal investment strategy is the key to selecting the right fund for you. This is based on your investment goals and risk sentiment, your individual needs, and your financial options, as well as your personal preferences. To help you assess this, a few questions can provide a lot of information. A structured process can help you find the investment fund that is right for you.

In this regard, it’s a good idea to rely on the expertise and experience of your financial advisor. They will be more than happy to support you in finding the right fund.

Before you invest in a fund, you should get an overview of the related risks and opportunities. Information is the foundation for every investment. If a person doesn’t understand a financial product, they cannot judge whether the investment is worth it and how high the risk is. The key figures that are necessary to assess an investment fund are summarised in a so-called “factsheet” or “key investor information document”. Volatility, the Sharpe ratio or the maximum drawdown – terms like these can initially sound like financial mumbo jumbo. But these terms can provide important information as to whether a particular fund is suited to your investment strategy.

The Investment Fund Act of 2011 (InvFG) forms the legal foundation for the creation of investment funds in Austria. It also contains detailed provisions on investor protection. There are two key aspects in this regard:

• All investors must be treated equally, regardless of the amount of their investment. Individual investor interests may not be shown preference within the framework of the diversification of the funds and the sale of fund units.

• Investment funds are portfolios of segregated assets: The InvFG stipulates that the fund assets are separate from the assets of the asset management company and the custodian bank. Consequently, these funds are preserved, even in the extreme event that these two partners go bankrupt, and investors have recourse to these funds.

The opportunity to earn a return is the hallmark of an investment. However, your investment can do more than just that – it can help support more sustainability. Just like when you go shopping and pay attention to where and how your food or clothes are produced, you can also pay attention to which companies and sectors your money is invested in, and what effect your capital has. Because investment is never neutral. Capital has a major influence on the development of companies. Your investment can help support companies in applying more sustainable business practices. In this manner, investors can have a direct impact, for example in relation to meeting climate protection targets. By choosing sustainable investment funds, you can make a conscious decision to participate in this process. Everyone who uses money makes a decision. Everyone can invest sustainably. Learn more.