As you have certainly noticed, in your visits to your bank’s counter or in the omnipresent announcements of financial institutions, an increasing offer of financial products and services, catering for all tastes and shapes.
If part of this offer is due to the demand of customers, nowadays a little more sophisticated ( or less iliterate ), part is also due to a growing demand for commissions by financial institutions.
A visible result of this commercial strategy, is the creation of a set of investment funds, furniture or real estate, so we think it necessary to deepen this theme a bit and create an Investment Funds Guide .
What are and what are the Investment Funds?
Simply put, an Investment Fund is a system of collective investment, which makes possible a diversified investment with risk and return sharing, executed by a team of professionals dedicated exclusively to the search for the best investment opportunities, at each moment of the year .
In the case of funds domiciled in Portugal, and following the recent tax changes, there are still fiscal advantages, both in relation to direct investment and through funds domiciled abroad.
Finally, there is the possibility of paying a set of commissions, which can be summarized as:
- Management fee – this commission is normally annual and is intended to compensate the work of the management team or the Management Company;
- Subscription fees – due at the time of purchase of units and in the generality of the funds, are between 0 and 3.5%;
- Redemption Charge – due at the time of sale of units and normally only exist when the average duration of the investment is not fulfilled by the investor;
- Transaction Costs – The purchase and sale of securities involves brokerage costs, which are borne by the customer. Depending on the asset class, these commissions / costs may represent up to 2-3% of the annual amount under management.
- Performance commission – unusual commission in conventional funds. It can have two sides of the medal. On the one hand, they encourage the management team to obtain better results. On the other hand, they may induce too high a level of risk in order to achieve the same results.
We emphasize that international entities are not in the habit of charging subscription and redemption fees.
Advantages of Investment Funds
- FOR THE CUSTOMER:
It acquires access to certain investment instruments which would otherwise be impossible or not advantageous in terms of operation, costs and time.
It induces some unconcern and comfort, since it does not need a regular monitoring, very time consuming, in exchange for an “invisible” cost. That is, the client does not need to have the time to manage and monitor the market, nor does he need all the knowledge to follow the variables that affect that investment.
FOR THE FINANCIAL INSTITUTION / MANAGEMENT ENTITY:
The benefits are much higher and are translated into commissions. These fees are not only used to cover management costs ( managers salaries, stock exchange transactions, support and commercial support payments ) but are also intended to ensure a very generous return, especially if compared to the value created for the customer .
How they can verify the offer in the banks regarding investment funds can be varied and likewise the charges with the subscription and redemption of such products can take different proportions depending on the type of fund.
Types of Investment Funds
Having mentioned the growing supply of investment funds, it is now up to us to summarize, in a simplistic way, the various classes of assets:
- Index Funds;
- Equity Funds;
- Bond Funds;
- Mixed Funds;
- Funds of Funds;
- Raw Material Funds;
- Currency Funds;
- Real Estate Funds.
It is true that not all of these products are efficient or suitable for all types of investors. So you should look for some advice ( by someone of your extreme confidence ) and a lot of consideration.