What are investment funds?

When it comes to investing our money, we have dozens of options. Some are more popular and well-known than others. Today, we talk about what investment funds are, a reasonably small type of investment in Spain, but which, in recent years, has done nothing but grow.

What is an investment fund?

An investment fund is a collective investment vehicle in which, quite simply, different investors come together to put their money into a fund that a third party will manage (known as “the manager”).

Because the amount available to manage is so large, this translates into greater investment opportunities (which would not be available if unit holders invested on an individual basis) and a lower amount of fees, because the broker is interested in the volume of money in the fund.

Investment funds are not quoted like stocks, but have a net asset value that is published at the end of each day. This net asset value reflects the value of the assets under management of the fund (which need not necessarily be equities).

In addition, it is worth mentioning that, for the investor, investment funds have very interesting advantages in terms of taxation. When you invest in investment funds, you do not have to pay for the money you are capitalizing in them until you redeem that money.

This means that we can be capitalizing for decades without going through the Treasury. Not bad, right?

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What types of investment funds are there?

Investment funds can be subdivided and categorized in many ways. However, there is a very clear and quite useful division for the investor, which is as follows:

  1. Passive management funds: In these funds, the management team does not choose the companies it buys or the times at which it buys or sells. It simply chooses a series of stock market indexes and indexes to them, replicating their behavior. As the manager’s work is so low in this type of fund, the fees charged are ridiculous (in many cases, they do not even reach 1%).
  2. Active management funds: In these funds, the management team selects the companies and the moment in which it buys or sells, investing in specific companies at the best moment (in theory). They do what is called stock picking and market timing. As this work is difficult, in exchange, they charge higher commissions (approximately 2%).

We recommend investing in passively managed investment funds, because actively managed funds rarely outperform the indexes and, in addition, charge high fees that erode your final return.

What are the most recommended passive investment funds?

Now, after clarifying that passive investment funds are better than actively managed funds, it is worth asking the question… “Which passive investment funds do I invest in?”.

And the truth is that by far the best option is to invest in a portfolio of index funds with automatic rebalancing.

This type of portfolio allows you to be indexed to the main indexes in exchange for very low commissions, and also has the advantage that automatic rebalancing allows you to maximize returns (because you sell what has risen the most and buy what has fallen the most automatically).

We invite you to take a look at our ETF and index funds portfolios. You are sure to find one that fits your needs.

As you can see, investment funds are a very intelligent way of investing, because they allow us to put ourselves in the hands of the best investors or, directly, to index ourselves to those economies or sectors that obtain the best returns.

CTA Wizard 2022 (ENG)

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