How An Investment Fund Really Works

How An Investment Fund Really Works

Investment funds are one of the most attractive products to grow your savings due to its versatility and high capacity for diversification. Before launching to contract it is important to have clear some basic concepts.

What is an investment fund?

The investment funds are Collective Investment Institutions that add the contributions of many savers to manage them through a single vehicle.

A fund will invest in different assets to try to obtain maximum profitability within its investment policy. To understand it better, a fund takes the money from its savers and moves it buying shares, bonds, treasury bills and even other funds.

How An Investment Fund Really Works In this sense there are different types of funds depending on where they invest and how they do it. Thus, one can speak of fixed income funds, variable income, mixed, global, guaranteed funds of funds or real estate funds. At the same time it is possible to distinguish between passive or active management funds and accumulation and distribution funds.

Those who participate in the funds

To understand how an investment fund works, it is also necessary to know who is involved in its operation.

Everything starts with the participants, that is, the savers. The unitholders are the owners of the fund, which divides its assets into shares.

The fund is managed by a management company. As its own name indicates who manages the fund and who decides how and where the money is invested.

A fund cannot be managed by more than one fund manager, but a fund manager can have several funds.

In addition to the manager, there is the figure of the depositary of the fund , who will be the custodian and monitor the assets that make up the fund. This entity must be registered with the CNMV.

How An Investment Fund Really WorksHow an investment fund works

The basic operation of an investment fund is very simple. The participant who wants to invest acquires shares of the fund and the manager is responsible for trying to make money and the fund grows.

The shares are the aliquots or parts that form a fund. Unlike the actions of a company, it is not a fixed number, since at a given time there may be someone who sells their own or who buys new ones.

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The price of each share will be determined by the division of the fund’s assets between the number of shares and that will be the purchase or sale value at a certain time. This can vary by the entry or exit of investors or by variations in the market value of the assets that make up the fund. The latter are those that will really affect the performance you get from a fund.

As an investor you can choose to withdraw your money from the fund at any time, although there are some that have specific windows for withdrawal.

Doing so will not pay taxes in case you choose to hire another investment fund . Otherwise, you will be taxed on the income statement for the benefits obtained at a rate of 19% for the first 6,000 euros, 21% for the amounts ranging from 6,000 to 50,000 euros and 23% for the surplus that exceed 50,000 euros.

How An Investment Fund Really WorksCommissions of the funds

Like most financial products, mutual funds charge a series of commissions to the unitholders. These commissions have to do with both operations and custody. These commissions are marked by law and can never exceed the following percentages for each of the following concepts:

The subscription fee is paid to the fund manager for investing in the fund and is calculated as a percentage of the capital invested, which means that in the end you invest less than you think.

The reimbursement commission is charged when selling the fund’s holdings.

The management fee is paid to the manager for their services, that is, for investing the fund’s money. This commission is accrued daily and is already deducted from the net asset value. In other words, subtract what your shares are worth. Active management funds will be more expensive than passive management funds in general terms.

A commission for success can be added to the management commission, which will subtract up to a maximum of 9% of the profits obtained by the fund.

The deposit or custody fee is charged by the depository entity.

Commissions are a fundamental part of a fund and can eat a good part of your profitability. Here you can see a concrete example for the Caixabank Bolsa España 150 fund, extracted from a Finect tool .

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