For the last one-two-three years, we have been facing the fact that interest rates have plummeted, The banks no longer offer deposits with interesting yields, so customers are being offered the alternative of investment funds. We will explain the risks associated with this, and how to know if the fund chosen, and the fund manager who decides where your money is invested, is the right one.
Risks associated with investment funds
It is important to be realistic: you cannot put money into an investment fund without being aware that there may be times when you are losing money. You should tell the client this, and not guarantee that you will make money, as this hides the reality (although it is quite possible that, in the medium term, you will make much more money than investing in a guaranteed fund).
We come across profiles of people who have been advised to invest in funds, when they are clearly risk averse, but were sold it as “a safe investment”. Or, if you need that money in a short time, the investment fund is not an optimal choice, as it is possible to go into a negative economic cycle, and not have time to recover the investment.
There are several categories such as: fixed income, mixed income (when there is already an equity component) and equity. Therefore, it is necessary to know the customer's profile well so that they do not enter funds that do not fit their profile.
Which funds and fund managers are best
In our opinion, although many variables play a role, there are three key elements to consider when choosing which funds to invest your money in, when you know you want to do so:
- What the Management Entity of the fund(s) chosen, is the best possible. There is a ranking of managers, prepared by Morningstar (a recognised source of financial information), which distinguishes the best ones, classifying them by large, medium and small. It is a reliable way of choosing, or at least recognising, which manager is better than another.
- The expenditure associated with the funds The investment funds in which they are invested must be warned about and known. They are listed in the fact sheet of each investment fund.
- What the management of the fund is ACTIVE: this means that the investment fund in which we invest in do not simply plagiarise the benchmark index (for example, not plagiarising the Ibex, but trying to beat it). In this way, what we would achieve is that when the results are negative, having chosen the best assets within the index, there would not be such a bad return; and if it has been a good year, we would try to improve the result.
To invest in products linked to investment funds, or to get good advice, contact us. Our Savings and Investment Department will help you.
