What is an Investment fund?

What is an Investment fund? 

An investment fund is a collective investment in which you can buy and sell units. By purchasing these units, you acquire from a fund company a share in a basket of equities, bonds, commodities, real estate or a mixture thereof. As a special fund, the fund assets and thus your deposits are also protected in the event of the fund company becoming insolvent. 

The great advantage of investment funds, especially for newcomers to the stock market, is their broad diversification, i.e. providers spread their investments across many different securities and thus also spread the risk. 

Closed and open-ended investment funds

Basically, there are two types of investment funds: those that are closed and those that are open. 

Closed-end funds are usually used to finance a single investment object, such as a shopping centre. Once the investment volume of the fund has been reached, investors cannot acquire any further units. Shares in closed-end funds have little liquidity and leaving before the end of the fund's life (usually several years) is expensive or even impossible. Another disadvantage: if the investment object turns out to be a mistake, the invested money is lost. 

Inexperienced investors should therefore refrain from investing in closed-end funds. In addition, this type of investment fund is not tradable on the stock exchange. Clearly more attractive and less risky are open, exchange traded investment funds. With this investment object one differentiates between actively and passively managed funds. 

Active investment funds

In the case of actively managed investment funds, fund managers compile, manage and regroup the fund assets in line with market developments. This is the classic form of an investment fund. The aim here is to outperform the return of the market measured by the performance of an index or other benchmark. In order to achieve this goal, long-term market studies and research are sometimes necessary. Active investment funds are therefore associated with management fees and other costs.

Passive investment funds

In the case of passively managed funds, the fund management passively replicates the structure of an index or market. This replication takes place automatically without any investment decision. As a result, the costs are usually lower than for actively managed funds. If passively managed funds are traded on the stock exchange according to certain rules, they are called ETFs, short for Exchange Traded Funds.

Which fund is right for me?

The most important criterion for distinguishing between funds is the investment focus or the strategy they pursue. There are funds that invest exclusively in large German companies as well as funds with emerging market bonds or theme funds, e.g. according to ecological criteria. 

A further important point of reference is the costs, as any fees incurred are deducted from your profit. Further advice on the pros and cons of a fund is provided by rating agencies that evaluate funds at regular intervals. The ratings include analyses of the corporate culture and investment strategy of the fund company. 

Performance in the past is only suitable as a selection criterion to a limited extent, as you cannot automatically deduce future price developments from past price developments. 

For the selection of a suitable fund, financial portals such as the Frankfurt Stock Exchange offer detailed search assistance. 

The fees of an investment fund are composed as follows

As an investor, you can purchase and sell fund units from an investment company at any time, whereby the investment companies often charge an initial sales charge to cover their distribution costs. However, around 40 percent of all funds offered in Germany are now also traded in an uncomplicated and cost-effective manner like shares on the Frankfurt Stock Exchange. The fund's administration costs are covered by the ongoing administration fee. 

Issue and redemption prices of the fund units are calculated and published daily by the investment companies on the basis of the stock exchange prices of the securities they contain. In addition to the front-end load and administration/management fees, many funds charge a performance fee. In the case of actively managed funds, this fee is due when a specified performance target or benchmark has been exceeded. The fee is generally between 5% and 25%. Detailed information on this can be found in the respective fund prospectus. 

For trading your fund units on the Frankfurt Stock Exchange, there are permanently updated prices, not just once a day, at which you can buy or sell the fund units. There is no front-end load, but there are bank and stock exchange fees. 

You have the choice: distribute income or have it reinvested automatically.

Many funds distribute income to savers once a year, for example from dividends on the shares they contain. Accumulating funds reinvest their income directly in the fund assets. Such investment funds are designed for long-term growth. 

Savings plans for investment funds

Almost all fund companies also offer fund savings plans: Here you pay a certain amount regularly, usually once a month, which is converted into investment units at the current daily rate. The constant amount allows you to purchase more units at low prices and fewer units at high prices. To buy shares in investment funds, you need a securities account with a bank or investment company. 

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