Erste Asset Management

Financial know-how – this is how an equity fund works

Financial know-how – this is how an equity fund works

Shares (equities) and equity funds – the same or not?

Only a small minority of Austrians invest directly or indirectly (via equity funds) in shares. Is it the fear of losses or the lack of knowledge about this asset class that make investors shy away from it? In this blog entry, I would like to give you an overview of the features of shares and equity funds.

What is a share?

Let’s assume a company is looking for capital for its business activities. The company can either take out a loan, i.e. debt, or it can offer an investment in the company (and in the company’s success), i.e. equity. Investors should know that for the latter case, they invest in shares (also referred to as equity, or equities).

Their features:

  • Investment in a company, no maturity, no redemption
  • Possibly an annual dividend (distribution to shareholders, not fixed, depends on the dividend policy of the company)
  • The investor has rights at the Annual General Meeting regulated by law

This means there are no regular payments, no fixed maturity, and no redemption of the capital invested. Are there, then, any arguments in favour of shares?

Participating in the rising value of the company through the investment

The investment in a company allows the investor to benefit directly from the know-how and ideas of the company. When a company produces good products, earnings and as a result the value of the company will be rising in the long run. This means that when it comes to shares, we are talking about investments in production facilities, human capital, buildings, brands etc. This is often referred to as “real assets”.

Worry about losses

Why do Austrians not invest in companies? It is not the investment itself that people are worried about. Rather, it is the price fluctuations – mainly the ones on the downside, i.e. price losses. This means the problem emanates largely from the effects of the shares being traded on the stock exchange, not from the investment per se.

What does an equity fund do?

As investor, you can invest in individual shares on your own. But how do you achieve a sufficient degree of diversification with limited amounts of capital? Here, equity funds offer a good alternative. They tend to invest in 50 to 150 different shares.

The Austrian Investment Fund Act focuses on the protection of investors. The duty to diversify, i.e. to spread the assets across different investments, is laid down in law and therefore a statutory specification for investment funds set up under Austrian law.

Every equity fund comes with terms and conditions which stipulate the kind of shares or equity markets the specific fund may invest in.

Basic categories are for example:

  • Countries
  • Sectors
  • Market capitalisation

Every equity fund is managed by one or more fund managers. (S)he selects the securities according to the terms and conditions and buys them on regulated markets.

An equity fund consists of many shares, i.e. the portfolio

An equity fund is supposed to cover a selected equity market on the basis of broad diversification. The capital paid in generally has to be invested entirely in shares (according to the terms and conditions of the fund). Cash plays a subordinated role in an equity fund.

The fund manager is solely responsible for the decision on what shares to buy. Investors have no say in this respect. The sum of all the assets in the fund is also referred to as fund portfolio.

The equity fund from the investors’ point of view

Investors can invest in an existing fund any time. Usually that is possible for smaller amounts such as EUR 100 as well. In return for the capital invested, the investor receives (fund) shares. Crucially, these shares can be sold daily at the current value. The capital investment company sets the volume of the dividend. While it is independent of the earnings generated from equity dividends, it often follows their trend.

Are equity funds safer than individual shares?

Safety is a relative term that is subject to different kinds of interpretation. It is often talked about in the context of price fluctuations. Given that individual shares are subject to sometimes strong fluctuations (and the equity fund consists of many shares), the price of an equity fund may fluctuate substantially as well. A lack of safety can also be regarded as the possibility of a total loss of capital invested. The price of every single individual share can fall to zero, if the underlying company goes bankrupt. Here, risk diversification in the portfolio serves as protection, because the scenario of all companies in the portfolio going bankrupt at the same time is very unlikely. Due to diversification, the weight of the individual shares in relation to the entire portfolio is rather small.

The different share categories of equity funds

Like other funds, equity funds, too, come with two different categories for investors:

  • A-shares: A-shares offer regular (at least annual) dividends. As part of the dividend payout, taxes are withheld as well. The dividend is paid from assets under management and is credited to the investor’s clearing account. As a result, the calculatory value of the fund share is reduced on the day of the dividend payout. This is a price movement that comes on top of the usual fluctuations.
  • T-shares: This share category focuses on value growth. The earnings remain with the fund, and only the taxes are paid out and at the same time forwarded to the tax authorities.

How is the share price of an equity fund established?

An equity fund consists of shares, the prices of which are established on the stock exchange. This means that for every security in the fund portfolio there is a daily market price. The calculatory value (i.e. price) of the fund is established by dividing the aggregate price of all assets under management (i.e. shares and cash) by the number of fund shares issued.

How to handle price fluctuations?

Equity funds may be subject to significant fluctuations. As example, please have a look at ESPA STOCK GLOBAL, a fund that invests globally in equities.

Chart: ESPA STOCK GLOBAL, performance 10Y, initial value standardised at 100 %
Source: Datastream, data as of 6 June 2017
Calculated according to the OeKB method. The performance data take into account the management fee, but do not take into account the one-off load of up to 5.00% due at the time of issue nor other costs that diminish performance such as account and depositary fees. Past performance is not indicative of the future development of the fund.

The chart illustrates the significant fluctuations very well. The right timing is important for the success in case of one-off investments.

Investment plans

In order to insulate one’s investment against the relevance of the price on a specific day, equity funds offer investment plans where investors can invest for example EUR 100 per month over a longer period of time. While this alternative will not allow investors to invest at the optimal (i.e. lowest) price, it will also protect them from investing at the peak. The ongoing investment plan results in an average price. Erste Bank and Sparkassen call this way of investing “s Fonds Plan”.

Note: Depending on the performance of the investment fund, the performance of an s Fonds Plan will differ from that of a single investment (higher or lower). A loss of capital is possible in both cases.

How do I buy the equity fund that I am interested in?

Equity funds are not usually traded on the stock exchange. Having chosen a fund, investors just have to go to their bank where the fund will be ordered. The fund shares are credited to the securities account within a matter of days. The purchase of fund shares tends to involve costs. Most often, the investor has to pay a one-off load (NB some banks charge transaction costs or advisory fees), which for equity funds usually ranges from about 3% to 5%.


Equity funds offer investors the chance to participate in companies (and their development) with small amounts while upholding the principle of broad diversification.

There are many different shares and stock exchanges. Likewise, there are numerous equity funds that cover these markets. The big advantage of an equity fund in comparison with individual shares is its diversification of the capital invested across many companies that operate in different countries and/or sectors. Diversification refers to a strategy that does not put all the eggs into one basket.

Diversification is part of the active managements of all Erste Asset Management funds.

For more information on the product range of Erste Asset Management, please visit our homepage at


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website A summary of the investor rights is available in German and English on the website and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

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Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

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