Funds made easy: The mechanics of investment funds
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Funds made easy. The mechanics of investment funds.

Funds offer investors promising investment options. But what exactly are funds and how do they work? Learn about the different types of funds, what benefits they offer, and what you should be aware of in this context.

What is an investment fund?

An investment fund can be represented as a collective pot: The capital of many investors is brought together. The cumulated fund assets are then invested in specific investments by fund managers. These can be equities, bonds, or real estate funds.

Each individual investor acquires unit certificates on the fund's total assets. The value of these is correlated with the price of the various securities that make up the fund. Investment funds allow private investors access to the capital market, which is otherwise difficult for them to access – for example, investments in China.

Cycle of investment funds mechanics of funds

Cycle of investment funds: The mechanics of funds
Source: Credit Suisse

Investment fund benefits

Diversification

One key advantage of funds is diversification. Like any investment, funds cannot escape market fluctuations. In order to reduce said fluctuations, investment funds consist of several securities. It can be various companies, regions, or asset classes. This creates a diverse portfolio, that spreads risk: Losses on individual securities are mitigated by diversification with multiple securities.

Investor protection

Investment funds are considered special assets. This means that the fund management company stores the invested capital separately at a custodian bank. The investment is therefore protected in the event that the issuer becomes insolvent prior to bankruptcy.

Expertise

Investment experts manage and monitor the fund: They assess market events on a daily basis and make decisions accordingly.

Liquidity

Fund units can fundamentally always be sold or topped up. As a result, investors remain flexible when planning their financial resources.

What kind of investment funds are there? The main fund categories.

Investors can choose from a wide variety of funds. For example, investments can be made according to investment strategy, by region, or by topic.
There are also funds for different asset classes, such as real estate funds or equity funds.

There will also be differences depending on the time horizon. If you're looking to invest long term, you can consider funds with a large proportion of equities. If you're only looking for a short-term investment, money market funds and bond funds are better as they are less risky.

Money market funds

Money market funds contain money market securities and other fixed-interest securities with short maturities and high credit ratings. You can invest in them for even just a few months. The risk is rather low, but so are the returns.

Bond funds
 

Bond funds consist of securities with fixed or variable interest rates and various maturities. Bond funds are a little bit riskier, but the returns are also higher. For bond funds, we recommend a time horizon of between four and five years.

Equity funds

Equity funds may be oriented geographically, by sector, or by the size of the company. They are exposed to relatively large price fluctuations and are thus the riskiest of funds, but they offer the best opportunity for returns. The time horizon should be at least five years.

Real estate funds

The fund assets of real estate funds are invested in real estate portfolios. Depending on the focus, this includes industrial, office, or residential real estate. The return on real estate funds consists of rental income and the increase in the value of the respective property, minus administrative costs.

Funds of funds

Funds of funds invest in other types of funds. The portfolio therefore consists of portfolios of several funds.

Mixed funds

Mixed funds, also known as multi-asset funds, consist of various asset classes. A mix of equities, bonds, real estate investments, commodities, and even currencies is therefore permitted.

Various investment strategies: Passively or actively managed funds

All investment funds can be managed either actively or passively:

Active investment funds

For actively managed funds, managers carry out real-time market analysis on economic trends and company-specific factors. They try to determine the most attractive prospective investment options as well as entry and exit points before the broader market reacts. This means that actively managed funds have higher management fees than passive funds. These costs often result in active funds being driven out by passive ones.

However, active management is better for markets with high divergences and volatility. This is because fund managers can take protective measures designed to limit losses. At the same time, they try to increase returns and outperform the market. Fund managers selectively buy unit certificates whose value they think will increase, and sell securities that they believe will fall.

Passive investment funds

Passive funds reflect the market by following a selected benchmark index such as the Swiss Market Index (SMI). The process is automated and no fund manager is involved. This reduces the administration costs for investors and makes passive funds a cost-effective investment option. Passive funds include index funds and exchange-traded funds (ETFs). ETFs are traded on the stock exchange on an ongoing basis, whereas index funds are not listed on the stock exchange and are issued by financial institutions.

Can I use investment funds to plan for my future?

If you want to both invest and save, the investment fund savings plan is a good choice. Saving via funds is particularly suitable for medium- and long-term savings goals such as saving for retirement. The investor chooses a time period during which a specified amount is regularly invested in the selected investment fund.

Can an investment in an investment fund also lead to losses?

Investments always involve a certain risk. To minimize this, the following is recommended:

  • Diversification: Diversification of the portfolio minimizes the risk of individual securities.
  • Long-term investment horizon: Market fluctuations are compensated for starting with an investment horizon of 10 years.
  • Regular investments: The purchase of investment funds over the years and at different prices leads to an average price effect. This will smooth out fluctuations over the long term.

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