Today we are going to tell you how investment funds work, their great advantages over other forms of savings and their taxation so that you can understand them and assess their suitability for managing your savings.
An investment fund is the legal form of a Collective Investment Institution or CII. It is an investment instrument formed by the capital of many investors whose objective is to manage and invest this unified capital in order to obtain a return. This global profitability of all the capital is then distributed according to the participation of each saver in the total capital.
The person who puts money into a mutual fund is called a participant because he or she participates in the total capital. The investor buys shares or aliquots of the fund which entitle him to a share of the possible profits.
How a mutual fund works
A saver contributes money to a mutual fund, which entitles him to a certain number of units, which in turn represent a proportionate share of the fund’s assets.
All the accumulated capital is invested in financial securities according to the investment fund’s strategy. With professional management, the investment fund obtains a return which means that the units are worth more. Thus, when the unitholders sell their units, these are worth more (net asset value) and a profit is obtained.
Explained in a simpler way, an investment fund is a cooperative of savers where everyone contributes capital that is invested to obtain a profit. By capitalizing more among all, size is strength, and it is easier to spread the money over several investments to reduce risk and increase total returns.
The fund’s capital is managed by professionals who adhere in their decisions to the fund’s specific policy so that the level of risk is fully transparent at all times for savers.
Advantages of a mutual fund
As we have already said, the first advantage of an investment fund is that the efforts of savers are pooled, making it possible to acquire many assets that would otherwise be unviable. But the list is much longer:
Units can be sold at any time at the net asset value with the guarantee that the managing entity is subject to solvency criteria, as well as by the rules of the Bank of Spain or by those of the National Securities Market Commission.
On the other hand, the securities or assets in which mutual funds may invest are held by a custodian entity, which may be changed if there are doubts as to its solvency.
Security of mutual funds
The security of a mutual fund comes from the fact that the units belong to the investor and that there are limitations on the assets in which the fund’s capital can be invested.
Supervision
The National Securities Market Commission (CNMV) supervises mutual funds and depositary entities on a monthly basis. In addition, the depositary entity monitors and supervises management and reports to the CNMV any incidents it finds.
Liquidity
The mutual fund updates the value of its units every day. Thus, unitholders can sell or buy units whenever they wish. Payment to the unit-holder in the event of a redemption takes a maximum of 72 hours. This makes mutual funds one of the most liquid savings instruments on the market.
Tax benefits
Every time a saver obtains something, the Tax Agency wants its share via IRPF. With mutual funds there is an advantage, which is to be able to transfer the money from one mutual fund to another without paying taxes. In the case of investment funds, it is considered that the profit or capital gain is only generated when the fund is sold and converted into liquidity.
Risk control
A great advantage of a mutual fund is that it allows the purchase of assets that individual investors would not be able to acquire. With pooled capital it is easier to ‘buy everything’, which benefits the participants because it diversifies in various investments (securities, issuers…) always within the characteristics of the fund.
Its own regulations limit the assets in which they can invest and the maximum percentages. This results in a broader and more diversified basket of securities, which reduces portfolio risk and maximizes returns.
Management in the hands of professionals
A very important aspect of an investment fund is the professionalism of the managers, since it allows knowing that there are experts behind the decisions of that investment fund.
Transparency
Given the characteristics of an investment fund, it is very important that there is transparency that allows savers to choose the fund that best suits their needs. This is achieved through a series of documents such as the fund prospectus, which explains the investment objective and risk profile of the product, as well as the expenses and commissions.
Also through an annual report, two quarterly reports and a half-yearly report explaining the decisions taken and the changes that have occurred in the investments.
However, the greatest transparency of a mutual fund is the access to the net asset value of each participation on a daily basis, which allows to know how each participant’s investment is progressing.
Adjustment to the investor’s profile
As each mutual fund has its own investment policy or strategy and this is public, the saver can choose the level of risk he accepts or spread his capital over several different funds to diversify further.
In short, an investment fund brings together the money of many savers to achieve more ambitious objectives in common. It is managed by professionals and supervised by public bodies, and both its operations and its policies are transparent, which generates more confidence in the saver.
This makes them one of the best investment instruments for all types of savers.