How to find the best investment funds

We'll give you some advice to help you find the investment fund that is right for you

Before investing in an investment fund, you must have a clear understanding of your investor profile to find the right fund for you.

Investment funds are one of the most commonly used financial products by investors looking to make a return on their savings. One reason for this popularity is the wide variety of funds that are now available. But how can you decide which fund represents the best fit for your profile? How should you select the fund that is right for you?

The key is your profile as an investor

Investment funds are financial instruments managed by professionals that combine the contributions of multiple investors and invest this money in the types of assets defined in the fund's information brochure. This is all done in order to obtain the highest returns possible.

Therefore, risk, time, and profitability are the three main aspects taken into consideration, based on the following fundamental principle: the search for higher returns is always associated with the need to assume greater risks.

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Investment funds and risk

All investments entail a certain level of risk. For investment funds, the risk is measured on a seven-point scale (1-7), as established by the Spanish National Securities Market Commission (CNMV). For example, a fund with risk level 1 represents the safest option on the market, although some risk will always still exist. On the other hand, a fund with risk level 7 has the highest level of associated risk.

Duration of the investment

When deciding whether to invest in one fund or another, you must always take into account the amount of risk you are willing to assume, as well as the duration (term) of your investment. These two variables, risk and term, are closely related. The longer the term, the higher the risk associated with the investment. And the higher the risk associated with an investment portfolio, the higher the expected returns will be as well. In other words, if you are able to invest for longer periods of time you can build a portfolio with higher risk, which will also have higher anticipated returns. However, if the duration of your investment is short, more conservative investment portfolios must be created. In other words, these will carry less risk and therefore lower expected returns.

This means that you need to be clear about how long you will be able to keep your money invested, especially if the investment fund being considered has a high level of risk.

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Investment funds and fees

There are also some fees associated with investing in funds, and these can vary quite a bit depending on the management entity or on the fund itself.

The main types of fees associated with investment funds are:

  • Management and depository fees: These are the fees charged by the fund's manager and by the depository bank, respectively. These are built-in fees, or in other words, they are charged directly to the investment fund and deducted from the fund's net asset value.
  • Subscription and redemption fees: these may be paid to the manager or else into the investment fund. These are explicit fees, charged directly to the investor at the time when shares are subscribed or redeemed.

As with any financial product, the fees charged may represent a significant expense when purchasing shares in an investment fund. Spain's National Commission on the Securities Market advises investors to carefully study a fund's informational brochure before making any investment decisions.

Before taking out an investment fund, it is advisable to speak to a professional adviser, who will be able to offer you a customized solution based upon your investor profile and your specific investment goals.

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