Funds ABC

Funds ABC
  • What is an investment fund?

    An investment fund is a pool of assets of several investors sharing the same goals, which is managed by an asset management company. Specific funds are managed by fund managers hired for this purpose.

    If you wish to invest your money in a fund, you have to buy fund units. Every unit represents a small model of the investment portfolio of the entire fund. For example, if the fund invests 5% of its assets in Baltika shares, then the holder of a one-hundred euro fund unit holds 5 euros worth of Baltika shares.

    The net asset value of the investment fund is calculated every business day – the assets belonging to the fund (shares, bonds, deposits, etc.) are valued and the obligations of the fund are deducted. Division of the net asset value of the fund with the number of units gives the net asset value of the unit, which is usually referred to with the abbreviation NAV.

    The foundation to the popularity of funds was laid by Harry Markowitz (born in 1927) with his portfolio theory as he proved that dispersion of a portfolio allows investment risks to be reduced considerably without the rate of return suffering in the long run. Funds operating according to today’s principles were first created in the US in the 1920s.

  • What type of investment funds are there?

    The most common method for classification of funds is according to their investment strategy – funds are differentiated on the basis of their risk levels.

    Money market funds are meant for short term (up to one year) investments. Their rate of return is similar to that of deposits and their risk level is very low.

    Fixed income funds or bond funds invest in corporate and government bonds. Bonds are less risky than equities and their rate of return is easier to predict.

    Balanced funds invest both in equities and bonds and their risk level and expected yield place them between bond funds and equity funds.

    Equity funds are characterised by units whose prices may fluctuate considerably, but a higher return may be expected in the long run.

    Funds can also be classified as open-ended and closed funds. Most of the funds offered by Swedbank are open-ended investment funds. If you wish to sell your units in an open-ended fund, the management company must repurchase them within one month. The management company is not obliged to do so in the event of a closed fund.

  • What is a fund of funds?

    A fund of funds is an investment fund that places its assets into different funds all over the world on the assumption that local fund managers have the best knowledge of local conditions and therefore are able to select the shares and bonds with the biggest potential.

    For example, if you wish to invest in an equity fund, you have to decide whether to invest in Asia, Russia or Europe.

    Then there is also the question of whether the time is right for buying. The fund manager of a fund of funds selects the most attractive regions on the basis of an investment analysis. The fund manager also decides about the timing for buying funds that invest into a certain region and when to sell them. This way, investors can benefit from the most interesting investment ideas from all over the world and the risks are also smaller than they would be if all the investors’ money was placed into a fund that only invests into one region.

  • Which fund to choose?

    Before selecting a fund, you should first take your time to think about your goals and establish your investment strategy – do you want to just protect your money from inflation or is your goal to earn the biggest possible return?

    For example, if you wish to avoid an even temporary decrease in the value of your investment at any cost, then the best thing to do is to invest in low risk money market or bond funds. However, if you are planning to invest for a long term, you should prefer funds with higher risk levels.

    Bond funds and balanced funds are suitable for investments for up to three years. Equity funds should be considered if you wish to invest for longer than five years.

    It is considerably easier to select a fund if you have a clear goal and strategy. However, there are many funds with similar strategies and therefore you should still analyse different funds that share the same general investment policy. Before you select a fund, you should find out what the fund invests in; what the risks associated with the fund are; who manages the fund and what the costs of the fund are.

    Article: How to choose an investment fund

  • How to assess the risk of a fund?

    Risk and rate of return usually go together. It is impossible to set earning the biggest possible income as your goal and be safe in the knowledge that the value of your investment is not going to drop at some point.

    It is highly likely that the funds or shares that increase the most when the market is on the rise will also lose more value in the event of a decline. The boom in Internet shares at the end of the 90s is a classic example. Even though there were a few people who managed to keep a cool head and warned that the prices of IT shares were ridiculous, not many were prepared for the wild crash that followed the boom.

    Even the decline of the general share market was bad enough – the market dropped 38.2% from the top in March 2000 to the bottom in September 2002. The value of the fund investments of unlucky Internet investors decreased as much as 80% at the time.

    You can assess the risk of a fund when you analyse the historical rate of return of the fund.

    Statistically, the risk of a fund is illustrated by the standard deviation of its rate of return, which measures the average difference of the fund's rate of return from the average rate of return over a certain period. You will find the standard deviation of a fund in its monthly report.

    Article: How to choose an investment strategy

  • Invest in global or local funds?

    Estonian investors have placed most of their investments into Estonia and also Eastern Europe. At the same time, it would be wise to spread the risks and make some investments into global markets.

    If share prices drop in the domestic market, it is likely that there are stock markets in the world that are rising or at least not falling as much. Swedbank Funds of Funds, which offer the opportunity to invest in global markets, still invest almost a half of the assets in their portfolios into the stock markets of Eastern Europe. This allows you to benefit from the fast growth in our region and spread the risks at the same time.

    The risk level and future rate of return of a fund is largely determined by where the fund invests. You will find primary information about the investment policy of a fund in the fund prospectus. It also contains a description of the fund’s typical investors, yield expectations and risks, which give the primary overview of the risks and rate of return you must consider when investing in this fund.

  • What is the smallest recommended fund investment?

    Most of the open-ended investment funds offered by Swedbank do not stipulate a minimum investment, but transaction fees and securities account charges do set a certain limit.

    For example, monthly charge for the securities account is 0,64 euros a month or 7,68 euros a year. In the event of a 630 euro investment, the monthly charge forms 1.2% of the investment amount. In the event of a 63 euro investment, this exceeds 10%, so in case of very small investments costs will substantially decrease the potential returns.

    Even though the recommended minimum investment also depends on the expected rate of return of the fund (e.g. the minimum investment for a money market fund with a low rate of return is higher than for a equity fund that has a higher rate of return), the general recommendation is that a single investment should be over 630 euros and if you are a regular investor, you should invest at least 30 euros every month.

  • How to buy fund units?

    Open a securities account in the Internet bank in order to buy fund units. You can select whether to open a securities or a trading account.

    A minimum transaction limit applies to trading account holders – 12 transactions within six months. You should opt for a securities account if you are a beginner in investing.

    You can define suitable daily and monthly transaction limits when you open a securities account. Once the securities account has been opened, you can buy fund units in the Internet bank. You can also conclude fund standing order contracts.

  • How to monitor rate of return?

    Information about the rate of return of a fund is available in the fund report in the Internet bank, but investors usually want more than the information about the fund’s rate of return when assessing the performance of a fund or selecting a fund. A more detailed overview of the fund’s investments is available in the monthly report of the fund.

    The monthly reviews may differ depending on the management company or fund strategy, but they usually contain the general data of the fund (asset volume, net asset value of units, data about the management company and fees, comparability index), comments by the fund manager, division of the portfolio by countries, currencies and economic sectors and a list of major investments.

    The overview allows you to decide whether the fund manager continues to follow the same strategy or whether significant changes have occurred in the fund, which could change the risk level of the fund and give you a good reason to review your investment portfolio. Please also consult your investment consultant if you have any questions or concerns.

    Article: How to read fund reports

  • How to sell fund units?

    According to the Investment Funds Act, the management company must repurchase units of open-ended funds within one month after receipt of the application of the unit holder.

    In reality, the management company repurchases the units considerably faster, usually within 1-4 days.

    The advertising materials of funds often mention a recommended investment term, which is generally between 6 months and 5 years. The recommended investment term is a suggestion to help investors earn the biggest possible return and last, but not least to avoid losing money. However, an investor may always sell their fund units earlier if necessary.

    Units of closed investment funds can only be sold if there is interest to buy them in the market. The management company is not obliged to repurchase the units.