How to get more return with your investment funds

Advice on how to select the appropriate investment fund for your needs

Investment funds are savings and investment vehicles, structured as entities that invest the capital of a group of investors. They are known as Collective Investment Institutions (CII). These savings instruments have gained much popularity in recent years thanks to the advantages they offer, such as easy access to financial markets, flexible contributions and redemption, tax exemption for transfers between funds and a wide range of investment options.

One of the most common mistakes that investors make when selecting an investment fund is basing their selection exclusively on past returns. Although such historic returns can certainly provide some indication of the quality and consistency of a fund's management, especially when analyzed over long periods of time, past performance can never provide any guarantee of future earnings. This means that you should never select an investment fund only on the basis of its past performance over some specific period of time.

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What you also need to understand very well are the different categories of investment funds and the assets they invest in, as well as what you should expect in terms of returns and risk from a short-term, medium-term, and long-term perspective. Considering these factors, the most interesting option often involves combining various funds or selecting a fund with a mixed profile. However, all of this will also depend upon your investment goals or reason for investing: protecting your investment, watching your capital grow, or generating a steady income from your savings invested.

You can find funds for three main categories:

Funds for a conservative investor profile

This category may include money market funds, fixed-income funds, guaranteed funds, or absolute return funds, all of which present subtle differences in terms of their risk. These products offer moderate returns with low volatility, or in other words, a low risk of deviation from an anticipated average return. These funds are most appropriate for investors who prioritize preservation of their investment, but they are not so suitable for medium-term or long-term investment, since their low returns make it hard to even maintain the initial value of the investment against the effects of inflation.

Funds for a risk-tolerant investor profile

These funds tend to invest in high-risk assets, such as corporate stocks. Although their aim is to generate high returns, they also expose investors to greater volatility. This category includes variable-income funds (also known as equity funds) and hedge funds. Given the volatility of the markets in which these funds invest, they are recommended primarily for long-term investment. Under such circumstances these funds offer their best results, since over longer periods of time they tend to produce the highest returns and protect the initial investment against the effects of inflation. This category is not advisable for those investing for shorter periods of time, however, since short-term changes in the value of these funds are more difficult to predict.

Funds for a moderate investor profile

These funds occupy a position halfway between the two categories described above. Their primary aim is to produce a balance between stability and capital growth, so they seek out an intermediate position in terms of risk. These are mixed-type funds that will put certain percentages of their overall investment into either fixed-income or variable-income assets. They are therefore recommended for medium-term and long-term investment because of their exposure to multiple levels of risk.

How to manage your investment in funds

It is essential to remember that investment positions never remain static, since the circumstances to which the assets are exposed can change, such as shifts in the overall economy or changes to interest rates or currency exchange rates. It is therefore necessary to periodically modify the percentages used to allocate portions of your exposure into different markets, in order to maximize returns and minimize risks. Although this adaptation is something that investors with a high level of knowledge can do on their own, for regular investors it is a good idea to rely upon a financial advisor in order to remain in sync with these economic changes, or to invest in funds with active management under the framework of a discretionary management contract, or to invest in “lifecycle” funds. This last type of fund mentioned progressively adapts your portfolio as its maturity date gets closer, from higher proportions of variable-income assets initially to more conservative assets and those with greater liquidity later on.
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Guidelines for investing in funds

1. Choose the term for your investment. As well as your own tolerance to risk, you will be able to determine which fund profile category you need.

2. Remember that past returns never provide any guarantee of future performance. It is more important to consider potential future returns than past returns.

3. You should make sure that your investments are adapted over time (as you get closer to your target maturity date, your investments should become more conservative), while also being adapted to the evolution of other factors such as economic growth or fluctuating currency exchange rates or interest rates.

4. If you prefer to delegate these management tasks then you should invest in risk-profiled funds or multi-asset funds, or else rely upon the services of a financial adviser.

5. If you want to transfer your investment to another fund, keep in mind that you can perform unlimited transfers between investment funds without any sort of negative impact in terms of taxation.

6. Diversification of assets: The old saying “never put all your eggs in one basket” certainly applies to the world of investment, and diversification is a good way to dilute your risk. You can distribute your investment into multiple funds, or else select mixed or risk-profiled funds where there is diversification between investment in fixed-income and variable-income assets.

7. Diversify your contributions: It is better to make contributions on a regular basis throughout the year than to make a single large contribution on a specific date. This will allow you to obtain a better “average entry price” instead of just a single value, which could be particularly high.

8. Variable-income funds tend to offer higher returns over the long term, comfortably exceeding the rate of inflation and the returns from funds that invest in other types of assets. However, if your investment horizon is less than 3 years it is not a good idea to invest only in variable-income funds.

9. Start building up your savings as soon as possible, since this will make it easier to gradually achieve your goals over time.

10. Make good use of the investment fund information sheets published periodically by management firms, since these contain important information about a fund's investment strategy, risk level, net asset value, returns, and portfolio composition.

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