Investment funds or deposits, which is better for saving?

Discover the differences between these two savings options.
All banks offer products designed to maximize the returns on their customers' savings, based on their needs and their risk tolerance. Investment funds and deposits belong to this category of financial products, although, beyond their common purpose of making money from savings, they are very different. In order for a saver to determine whether investment funds or deposits are the options that best suit their interests, it is essential for the saver to first understand what each of them consists of. Its main characteristics and differences are explained below.
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Characteristics of an investment fund

Investment funds are classed as CIIs (Collective Investment Institutions). They are a financial product that allows individual investors to have a diversified investment that is managed by professionals. The investors or shareholders pay a certain amount into the fund or funds of their choice, which is pooled to form the fund's assets. To determine how much each share in the fund is worth, its assets are divided by the total number of participants. The result of this calculation is what is known as the net asset value, which is calculated daily and is used to determine the actual value of the investment at any given time.

Just as participants can invest in or purchase shares, they can also easily sell or reimburse them to obtain liquidity. Although these products are generally very liquid, with redemptions taking place in a few days, it always depends on the type of investment fund in question. They are normally classified by their investment policy, that is, based on the assets they invest in, but there are other factors such as the existence of guarantees. In these cases, the liquidity tends to be more restricted.

Characteristics of a deposit

A deposit involves the customer lending an amount of money to the bank for a length of time under specific conditions. Generally, these conditions not only guarantee the repayment at maturity of the amount lent; they also pay interest that provides returns to the customer. In other words, deposits work like loans that customers make to the bank in exchange for the agreed returns.

Deposits are a key element in how traditional banking works. Although these products are not normally referred to as deposits, checking accounts and savings accounts are types of deposits with lower returns in which the customer has little to no problems accessing their money. However, it is the fixed-term deposit that is usually considered as the savings and investment product that is comparable to funds. They offer guaranteed returns that will be directly linked to interest rates. The interest may be paid periodically or at maturity, although if the customer wants to withdraw their money before the end of the term, a penalty may be applied to the interest paid, but never to the principal.

Differences between an investment fund and a deposit

The characteristics of each of these financial products already show that there are certain differences between them. However, there are a number of issues that are key to distinguishing them and deciding which one is best suited to each profile. 

Deposits offer a safe yield that is known in advance. The customer knows, when the investment is made, what its returns will be at maturity. Investment funds are subject to market trends and, except in the case of guaranteed funds, where the minimum yield is known, the result of the investment can only be evaluated once the positions are sold.

Deposits are generally intended for conservative customers with a short-term investment approach. The fund, however, includes investors of all risk profiles, from conservative to aggressive. From investors looking for short-term returns to those who invest in the long term or with no specific time frame in mind. Therefore, someone who invests in funds is able to decide the risk level they are willing to accept, and therefore what returns they hope to achieve. The relationship is well known: looking for higher returns will mean taking on greater risks. The idea of risk is closely linked to another difference: guarantees. In order to protect savers from potential solvency problems, deposits are guaranteed by the Deposit Guarantee Fund (DGF) for up to 100,000 euros per person and bank. This means that even if the bank where the deposit was made becomes insolvent and can't pay the money back to the customer, the DGF guarantees its repayment up to that amount.

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Investment funds, on the other hand, don't have this type of protection. However, this doesn't mean they aren't safe products. The fund is outside the bank's balance sheet, deposited in an entity that is independent of the management company and supervised by Spain's Securities & Exchange Commission (CNMV). Finally, these products also differ in terms of their periods and liquidity. Guaranteed funds are more similar to deposits in this regard, since they have a maturity date on which the guaranteed amount becomes available. In any case, most funds do not have a maturity date, which allows them to offer great liquidity. Participants in an investment fund can withdraw their contribution at any time and in approximately two or three days. The value of their contribution will, however, be determined by the market.

At BBVA, we want our customers to have the best savings options so they can get the most from their money. BBVA offers a wide range of investment funds and deposits that provide great returns to all types of customers. If you're not sure whether to put your savings in an investment fund or a deposit, visit bbva.es or any BBVA branch to get the advice you need.

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