Investment Funds

What are they?

An investment fund is a collective management tool: the financial resources of various people are pooled and jointly invested in the financial markets.  In this way an investor, by participating in a fund, entrusts his/her savings to one or more finance professionals organised in the form of a management company.  The “money managers” will handle the search for the most profitable way of investing the fund’s assets choosing from shares, bonds, liquid assets and diversifying between geographical areas, product sectors or issuer capitalisation according to the operating limits of the fund in question.  A private investor who subscribes the fund’s units, even with small amounts of capital, is able to diversify his/her investments: with a high amount of money, in fact, the funds can be distributed over a greater number of securities than would be possible for individual investors.  In this way it should be feasible to reduce the systematic risk.

The funds can be differentiated between open-ended funds and closed-end funds. The former may be subscribed at any time, and at any time it is possible to obtain full or partial reimbursement of the capital contributed.  For such purpose, usually the funds constantly maintain part of their portfolio in liquid assets: this may adversely affect the performance of the financial instrument, but at least it ensures that units can be divested quickly and easily.  It is possible to participate in open-ended investment funds through placement on the part of the actual Management Companies, Stock Brokerage Companies (via Financial Advisors) and Credit Institutions.

Closed-end funds, on the other hand, have an asset base that is fixed and contributed at the time of its formation.  Sometimes timing windows are provided during which it is possible to carry out new investments or request redemption, but normally such possibilities are quite limited and uncommon.  These collective investment tools can therefore only be subscribed during a certain period of time and the repayment of capital may only be requested on the fund’s maturity or after a certain number of years.  Outside of these periods of time the units of a closed-end fund can only be bought and sold on the Stock Exchange.  Whilst the investment is scarcely liquidable, in this case the managers are able to plan longer-term investments and do not need to “park” resources in liquid assets.  In theory, therefore, closed-end funds can be more profitable.

As regards the remuneration of subscribers we can differentiate between accumulation funds, where the results of management are not distributed to investors but are automatically reinvested in the fund and progressively capitalised and distribution funds, where interest payments, dividends and premiums are paid directly to the investors.

The so-called umbrella funds are a group of complementary funds which are normally managed by the same company.  The main characteristic concerns the fact that the investor can switch from one fund to another easily, quickly and with limited expenses.  This enables sector or geographic rotations in order to take better advantage of the various market opportunities, but also the transfer from one asset class to another (for example from bond to equity funds).