There are many reasons to make income-oriented provisions – be it to provide for retirement or maternity leave, to save for larger investments or to finance the education of children or grandchildren. However, only very few of us have the resources to deal with the events on the international financial markets on a daily basis – even more so because these events cannot always be explained rationally. This is where actively managed investment funds come into play, because the fund management takes care of all these issues.
What is an investment fund?
In an investment fund, the money of many investors is collected, and the fund company invests these assets in selected securities, e.g. shares, bonds, real estate, etc., in a bundle. The respective portfolio is managed by fund managers who have expert know-how and spread the money widely, also considering legal requirements. This measure is intended to reduce risk, which is referred to as diversification.
For each fund, a net asset value (NAV) is calculated regularly, usually on a daily basis, based on the prices of the securities contained in the fund. Investors receive shares in the fund assets in return for their payments into the fund and participate directly in the performance of the investment fund. The number of fund units is not limited, and new units can be issued at any time – this is why it is called an open-ended investment fund. In addition, access to the assets is also possible at any time – fund units can be sold again at any time.
Investment funds have the advantage that you can participate in the success of companies (equity funds) or receive interest from states/companies (bond funds) even with small, regular amounts. Nevertheless, investment funds cannot escape the price fluctuations of the underlying securities.
Where can investors find information?
Anyone interested in investing in investment funds will quickly come across a large number of different documents and technical terms. However, you should not be discouraged or confused by this.
The following documents are helpful to get an overview:
- The “Factsheet” serves as an initial orientation and is intended to provide an overview of what distinguishes the fund. The aim of the factsheet is to provide investors with a basic picture of the fund’s investment and past performance. The fund company makes the factsheet available both online on its website and in printed form, regardless of where or how the fund unit is purchased.
- The Key Information Document (KID) illustrates in a legally standardised form the most important information regarding the selected investment fund, such as the investment policy or the cost structure. The KID must be made available to investors before they make an investment decision – either online on the fund company’s website or in printed form, regardless of where or how the fund unit is purchased.
The most important technical terms and key figures at a glance
Both in the factsheet and in the KID, one is confronted with a number of key figures and technical terms. Here is an overview of the most important of them:
- Unit certificate classes
Investment funds can be divided into different tranches (so-called unit certificates). Although each share certificate class has its own ISIN – an international identification number for securities – the different tranches do not differ in performance because they are all based on the same investment fund. However, the individual unit certificate classes can differ from each other, for example, in the amount of the ongoing charges.
Investors can decide individually whether they want an annual distribution or prefer to reinvest the income. Depending on this, one receives A-units, which guarantee an annual distribution (A), or T-units, whose income is reinvested (T) and remains in the fund.
The calculated value of the A units decreases on the day of the distribution by the amount that is distributed. This is a planned price decline. Investors are treated equally in both cases:
- In the case of A units, the distribution amount (minus any taxes) is transferred to the clearing account and
- in the case of T units, the same amount (minus any taxes) remains in the fund, so there is no capital loss.
Irrespective of the type of distribution, securities prices are subject to fluctuations that are influenced by various factors.
Performance is the historical, objectively measurable development of the value of an investment over a defined observation period. This is usually a period of one, three, five or ten years, the current year from the end of the previous year (Year-to-Date – YtD) and since the start of the fund. In principle, the calculation is made without deduction of individual investor costs (e.g. issuing fees, custody fees, taxes), but the ongoing costs of the fund are already taken into account in the performance and are shown in the KID. The performance can be shown as a percentage over the total term (cumulative) or as a return per year (p.a.). Investors should note that past performance values do not allow any conclusions to be drawn about the future performance of the investment.
- Sharpe ratio
With every investment, the question arises as to what level of risk is required to achieve a corresponding return. The Sharpe ratio is a standardised key figure that puts the performance in relation to the risk taken. The higher the value, the lower the risk with which the return was achieved. The value should be above one, because only then were investors rewarded accordingly for the risk taken. It is important in this context that only those securities should be compared by means of the Sharpe ratio that have similar characteristics. Consequently, the Sharpe ratio comparison of an equity fund with a bond fund would make little sense, whereas the comparison of two similar equity funds is very meaningful.
Volatility describes the range of fluctuation in the price of securities and is a standardised measure of the risk of an investment. The higher the volatility, the higher the fluctuation range of the security price and the riskier the investment.
The following ratios are typically used in the valuation of bond funds:
- Modified Duration
Modified duration indicates the percentage by which the value of a bond or bond fund increases or decreases over its term if the market interest rate shifts by one percentage point. Basically, the value of a bond falls when the market interest rate rises.
The yield in relation to the final maturity of a bond indicates the annual return in per cent that an investor achieves if
- a bond is bought at the current market rate
- all interest payments (=coupons) are collected
- these, in turn, are reinvested at the same rate as the original yield
- and the redemption at final maturity is 100%.
In this way, bonds of basically the same quality but with different maturities, coupon amounts or prices can be compared with each other. In this context, it is important to note that focusing on the coupon of a bond alone is insufficient, as only the interest distributions to the investors are taken into account here.
Since a bond fund consists of a large number of bonds, the average bond yield is calculated as a ratio of the bonds contained in the fund.