Whether you want to protect your money from inflation or increase your capital, investing in investment funds is one of the possible solutions. However, before you invest your hard- earned funds anywhere, you need to know exactly what you are investing in. In this blog, we will try to answer some of the most important questions regarding this type of investment in a professional, yet understandable way.
What is an investment fund?
An investment fund is a form of collective investment that aims to raise funds from multiple investors and place them on the capital market, i.e. stocks of many companies, bonds, etc. The investment unit represents a proportional accounting share in the total value of the fund. Thus, the sum of all investment units makes up the investment fund. This means that each investor will become the owner of a certain number of investment units whose value is determined in the above-mentioned way. It is the collective (joint) investment of many investors that is the most important characteristic of this type of investment, from which many benefits arise.
What are the types of investment funds?
There are two basic types of investment funds:
1) the Undertakings for the Collective Investment in Transferable Securities (UCITS) - These funds issue investment units and repurchase them at the request of investors. In this text, we will deal exclusively with this type of investment fund, because these investment funds in Serbia are available to anyone. Investment funds in Serbia are regulated by the Law on UCITS ("Sl. Glasnik RS", No. 73/2019; hereinafter: the Law).
2) Closed-end collective investment undertakings - These investment funds function as joint-stock companies, issue stocks, and do not buy them from investors but are traded on the secondary market.
Foreign investment funds in Serbia are registered and exist in accordance with the regulations of the Republic of Serbia. Most of the funds are actually a foreign brand that operates in Serbia. They are registered in Serbia, but they are practically foreign investment funds. Some of them are the largest investment funds in the world. These are all privately owned and operated investment funds, which is more convenient for investors because they operate on a market basis. There are also alternative investment funds in Serbia (for example venture capital), concerning which the Law on Alternative Investment Funds was passed in 2019, however that is the topic for another blog.
Depending on the investment goal (what the fund and investors want to achieve by investing), the collected funds of investors can be placed in different ways - in less (shares) or more (bonds, bank deposits) safe investments. In the simplest terms, shares represent a share in the property of a joint-stock company, i.e. the owner of the share becomes the co-owner of the company, while the bonds are simply securities by which the debtor recognizes and confirms that he owes to the creditor, i.e. the issuer of the bond states that he owes the written amount to the bond owner, plus a certain interest.
In this sense, having in mind the investment goal, we can distinguish the following types of investment funds: 1) Asset Preservation Funds 2) Income open-end investment fund 3) Balanced open-end investment fund 4) Asset value growth funds 5) General nature funds
What are the benefits of investing in an investment fund?
Investing in an investment fund is a smart decision because:
- Your money is managed by experts - In order to invest independently in the stock market, you must have a lot of expertise in the field of investing. Of course, most people do not have that knowledge. Private investment funds in Serbia pay great attention to the expertise of their staff who manage money because their business model depends on it. That is why investing in an investment fund is a smart choice because the fund's assets are managed by educated financial experts with vast experience.
- Lower investment risk - Risk management is an important feature of an investment fund. Capital from the fund is invested in various financial instruments, but in such a way as to control the risk that is inevitable in the world of investing. This control is called "risk diversification" and is achieved in different ways, which will be discussed later in the blog.
- Money is easily available to you - The funds you have invested in an investment fund is highly liquid and easily available to investors. Although Article 55 of the Law stipulates that the deadline for redemption of investment units by the fund is 5 working days, most investment funds make payments to investors within 24 hours of submitting a request for redemption of investment units. Probably no other investment is so highly liquid, ie. "convertible" into cash in the short term, which is another advantage of this type of investment.
- Lower investment costs - Independent investment in the stock market implies higher financial costs for investors. First of all, buying individual shares is expensive, it is necessary to hire a broker and pay commissions. Joint ventures pass on all these costs to a multitude of investors so that they are charged in proportion to the share that a particular investor has in the fund's portfolio.
Is the investment fund a risky investment?
Every investment contains a certain amount of risk. However, as we have mentioned, it is characteristic of investment funds to manage risk by diversifying investments. Companies in a variety of fields, countries, and currencies are much less likely to do worse than investing in a single company or a smaller number of companies. The best example of diversification is given by the proverb: "Do not put all eggs in the same basket". This means that if you invested $100 in one company, and it failed, you would be left with nothing. However, if your $100 is invested in an investment fund that contains shares of hundreds of companies, the chance of losing all your money is almost non-existent.
In order to explain diversification in the most vivid way possible, we will imagine that you invest $100 in an investment fund. This money can be distributed in one or more of the following ways:
- Diversification by companies - Example: 2% of Coca-Cola shares, 2% of Mercedes shares, 2% of Microsoft shares, etc.
- Diversification by country - Example: 10% of shares of American companies, 10% of German, 10% of Russian, etc.
- Diversification by areas - Example: 10% of shares of pharmaceutical companies, 10% of technology companies, 10% in the food and beverage industry, etc.
- Diversification by currency - Example: 10% in companies pegged to the dollar, 10% to the ruble, 10% to the euro, etc. So, these are foreign exchange investment funds.
What is an investment fund prospectus?
What is an identity card for a person, is a prospectus for investment funds. It is a document that contains all the most important characteristics of the fund that are important to investors when making a decision on investing and choosing the investment fund in which to invest.
Some of the most important information contained in the fund's prospectus are investment goals, investment policy, fund commissions, and other critical information. Based on the insight into the fund's prospectus, future investors decide whether, for example, to invest in pure equity funds that bring higher returns but also higher risk, ie. in funds with bonds that are safer but also bring lower returns.
Article 63 of the Law stipulates the obligation of the investment fund management company to inform investors within eight days about the occurrence of significant changes due to which the data from the prospectus do not correspond to the actual situation. For example, if the fund's prospectus stipulates that the fund will invest exclusively in bonds and bank deposits if the fund decides to invest in equity shares, it would be obliged to inform investors. The reason for this is that bonds and bank deposits are still somewhat safer investments compared to equity shares, and investors may have decided to invest in these instruments for security reasons.
What are the rights of investors in an investment fund?
Article 48 of the Law stipulates the rights that investors have based on the ownership of an investment unit:
1) The right to a proportionate share of income - This means that you, as an investor and owner of investment units, are entitled to a proportionate share of the income that the investment fund generates. Investment funds provide different returns depending on the type of investment, so earnings largely depend on the type of investment fund. 2) The right to dispose of investment units - The investor as the owner of investment units has the right to dispose of investment units so that they can be easily sold. 3) Right of redemption - The investor has the right to request from the investment fund to redeem a certain number of investment units from him and to pay him a fee in cash to his current account. 4) The right to a proportionate share of the fund's assets in the event of its dissolution - In the event of the fund's dissolution due to reasons prescribed by law, the investor as the owner of a number of investment units acquires the right to a proportionate share of the fund's assets. 5) Other rights - The investor has other rights prescribed by law and regulations, as well as bylaws of the fund, such as the right to notification in the form of quarterly reports on the fund's operations or opening an ownership account to monitor the value of fund investment units.
How do I start investing?
In order not to make the wrong financial decision, our sincere advice is to hire a lawyer when joining the investment fund to help you do it the right way. Although access to an investment fund seems simple and easy, we should not forget that buying into an investment fund is a serious legal action that should be treated in this way.
Steps to access the investment fund are:
1) Choice of the type of fund and risk of investing in the particular fund by gaining insight into the fund's prospectus; 2) Decision on the total limit, duration of the investment, and the amount of the initial investment; 3) Filling in the application form for the investment fund; 4) Payment of funds to the fund's account; 5) Opening a personal account of the investor to monitor the value of the portfolio.
This blog was written in informational purposes and it does not reflect any legal advice, or advice for investing at any investment fund. For legal services, tailored to your needs, write us on [email protected]
Author: attorney at law Stefan Pekić, law office Pekic