What is the investment principle that you follow

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Mutual funds are like a pot that contains the money of various investors and invests as total assets in various assets. With fund investments, fund companies manage the assets of their customers. In line with the principle of broad risk diversification, institutional investors invest the pooled money of their investors in various assets on behalf of the fund company.

In addition to stocks and commodities, the most important investment segments of investment funds include currencies, real estate and bonds. The investment priorities and goals are specified in the company regulations. With the appropriate fund alignment, private investors generate relatively attractive returns even without market knowledge.

Thanks to easy access to international capital markets and management by experienced fund managers, investments in mutual funds are more suitable for many private investors than, for example, stock speculation. On the other hand, the investor incurs fees due to the management strategy that are not applicable to other forms of investment.

Mutual Funds: Types & Characteristics

Mutual funds differ from one another in a number of ways. The main differences relate to

  • the group of investors (mutual funds versus special funds).
  • the tradability (open versus closed investment funds).
  • the type of assets (classic versus alternative investment funds).
  • the focus on certain segments (including money market, commodities, stocks, real estate & bonds).
  • the use of income (distributing versus reinvesting investment funds).
  • investment management (active versus passive funds).
  • the geographic region (international versus national investment funds).

The design options with regard to investment funds are almost limitless. Mixed forms are possible for assets, for example. In addition, overlaps between the types of funds mentioned are the rule. Therefore, for example, equity funds can be passively managed, international, reinvested and open-ended mutual funds at the same time.

Investor group: Investment funds differ in terms of accessibility

When German banks issue investment funds, these investments are always so-called mutual funds. This applies to every investment segment. Even specialized theme or sector funds fall under this type of fund for bank issues.

Mutual funds are accessible to every investor. In this case, purchased units do not promise any say in the selection of the main investment segments. Whether you are offered public or special funds depends primarily on your budget.

What characterizes special funds

The special fund is the counterpart to the mutual fund and, unlike the latter, does not address the general public. All special funds are intended as exclusive investments for certain clients such as pension funds.

In many cases, credit institutes design special offers especially for the institutional investor who has been entrusted with the representative investment by the respective client. Because special funds are developed for the individual investor, they are more adaptable than regular mutual funds.

Why institutional investors get special funds

Banks prefer institutional investors because they regularly invest large amounts in the money market for their customers. Special funds express this preference by taking into account the individual needs of the investor.

The right to have a say in portfolio focus is a common feature of these exclusive mutual funds. The entry-level sizes for special funds often run into the millions, making them unsuitable for savers and other private investors.

Popular mutual funds: comparison of different investment segments

The focus on assets makes the difference between traditional and alternative investment funds. The latter do not trade in securities, but in alternative investment objects such as raw materials or real estate. The concentration on certain investment segments influences the risk-return profile.

The fund assets always correspond to the sum of all assets contained in the overall fund. For example, if the focus is on investing in the commodity gold, any increase in the price of gold will correlate with the percentage of the fund's return. In comparison, foreign currencies determine the return on equity funds.

How investment segments influence the risk-return profile

Assets like gold have historically proven to be relatively low-volatility investments. Depending on the tendency of the main assets to fluctuate, investment funds are either safe or risky investments.

The level of fluctuations and risks correlates with the possible return. In this regard, stocks are one of the riskier, but high-yield focus areas. In principle, theme and sector funds are also associated with a higher risk, as these investment funds consciously decide against diversification.

Significant investment segments

At the end of 2017, statistics for German money market funds showed the highest volume of assets. The return on these investment funds results from interest rate developments on the money market.

Fund managers with a focus on the money market invest in bank balances and liquid money market instruments. In addition to promissory notes and bonds, the latter include fixed-income securities with a short remaining term.

Important fund features for investors

In addition to the differences mentioned, other fund characteristics play a role when deciding on a specific investment fund. Many special funds, for example, correspond to closed-ended investment funds that are characterized by limited capital inflows.

Planned investments specify the capital requirement. Once this amount has been covered, the fund will initially no longer accept any investments until the respective investments have been made and the proceeds have been distributed. In contrast to closed funds, open funds continuously allow new investments and have unlimited fund shares.

Differentiation according to the time of investment and distribution

Just as open and closed fund investments differ after the acceptance of any deposits, the difference between distributing and accumulating (reinvesting) fund types is the distribution of income.

Depending on the investment policy, investors usually receive interest and dividends earned from the former funds on an annual basis. In this case, with each distribution, the unit price is reduced by the amount paid out. In the case of accumulating investment funds, on the other hand, the income generated is used to purchase additional securities, which increases the potential for returns.

Fund types by type of management & investment region

The fees that are deducted from the total income generated before the distribution is made depends on how the fund's assets are managed. In contrast to active funds, passive investment funds are not managed by managers, but rather track the performance of an index. Examples of this cost-effective investment variant are the ETFs.

As with all other fund decisions, the geographic region can play a role for such fund investments. With country funds, you only invest in securities from certain countries. Regional funds, on the other hand, are more broadly positioned, while the international type of fund completely dispenses with geographical focuses in favor of a broader diversification.

This is how investing in mutual funds works

Mutual funds offer investors different advantages. Thanks to the risk diversification principle, fund managers do not invest their assets in individual investments, for example, but in a diverse portfolio. If an individual item loses value in this case, other investments can compensate for this loss.

The Investment Act, which ensures the monitoring of agreed investment principles, contributes to the security of such financial investments. Because you can sell or return investment fund units at the current price at any time, you benefit from high liquidity. Classic equity investments also offer you this flexibility. In contrast, with active funds, however, a team of experts takes care of the investment management.

This must be taken into account when investing in funds

As a private investor, fund investments give you access to investments even with small amounts that you would not be able to afford apart from the total assets of a mutual fund. If you want to buy fund shares, you can contact your house bank, independent fund brokers, direct banks or capital investment companies. Before buying, it is important to define an investment strategy.

You either invest your total amount immediately or you invest your investment amount gradually. Depending on this decision, you make a pre-selection of suitable funds. Personal investment goals also influence the choice of the best investment fund. In doing so, pay attention to possible profit targets expressed in the guidelines and assess any given maturities taking into account your life situation.

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