Investment funds are one of the most used financial products by investors seeking to take advantage of their savings. One of the main reasons is the great variety of existing funds. But how to know which background is the most appropriate for your profile? How to choose the fund that suits you best?
The key is your investor profile
Investment funds are investment instruments that bring together the contributions of various investors, which are managed by professionals and jointly invested in the assets that are defined in the fund’s prospectus. All this to obtain the maximum possible profitability.
Therefore, risk, time and profitability are the three main keys to be managed, always taking into account a maximum: the search for greater profitability is always associated with the need to assume a greater risk.
The risk in investment funds
All investments are associated with a risk that in the case of investment funds is measured on a scale of 1 to 7, determined by the National Securities Market Commission itself. Thus, a fund that has risk 1 represents the safest option in the market -although risk always exists-, while a risk fund 7 has the highest risk associated with it.
The term of the investment
When deciding on a fund or another, we must always take into account the risk we are willing to take, in addition to the investment time horizon. These two variables, risk and time horizon, are closely linked. The larger the time horizon, the greater the risk associated with the investment. The more risk an investment portfolio has, the higher your expected return. That is, for long time horizons, you can build portfolios with more risk, resulting in a higher expected return. In the event that the time horizon is short, more conservative investment portfolios should be constructed; that is, with less risk and, therefore, lower expected profitability.
We must be clear about the period of time we can maintain our investment, especially if the investment fund has a high level of risk.
On what profitability should you set?
When investing in a fund, the historical profitability of it can turn out to be a determining factor. It is worth remembering that historical returns are an indicator of how the fund has behaved in recent years, but at no time guarantee future returns. If we analyze past profitability, it is better to do it in long terms, from three years on, because in this way we will be checking the consistency of the fund.
In addition, the purchase of a fund should not be done because of the profitability it has had in recent months, but because of the potential for future profitability.
We must bear in mind that to compare investment funds, they must have the same characteristics, that is, we should never compare fixed income funds with equity funds since the assets in which they invest are different.
Commissions in investment funds
The investment in funds has associated fees, which may turn out to be very different depending on the fund manager or entity.
These are the main fees of the investment funds:
- Management fee and deposit: these are the fees charged by the manager and the depositary, respectively. These are implicit commissions, that is, deducted from the net asset value of the fund, directly charged to the investment fund.
- Subscription and reimbursement fees: may be in favor of the fund manager or investment fund. These are explicit commissions, charged directly to the participant at the moment in which it subscribes or reimburses shares.
As in any financial product, commissions can represent an important expense when buying shares of an investment fund. The National Securities Market Commission advises the investor to consult the information brochure of the fund before making any investment decision.
Before hiring a product of these characteristics, it is important to go to a professional consultant with the ability to offer you a solution tailored to your needs, depending on your profile and your particular investment objectives.