Types of investment funds

We'll explain the various types of investment funds that exist and describe their main characteristics
Having knowledge about the various types of investment funds available on the market, and how these are classified, can be very useful when the time comes to make decisions about investing your money in one or more funds. With this in mind, we are going to take a look at the various types of investment funds that exist. We will describe their characteristics and the investor profile for which they are the most suitable. To do this, we are going to primarily focus on each fund type's investment policy, or in other words, the types of assets they invest in. Let's begin.
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Fixed-Income Funds

Fixed-income funds are those where the majority of the capital is invested in fixed-income assets, with changes to interest rates being the factor that will influence the evolution of these funds the most. The shorter the maturity period for the assets the fund is investing in, the lower the risk and therefore the lower the return. On the other hand, investment in assets with longer maturity periods means higher associated risk and therefore higher potential returns.

These funds are especially suitable for investors with a conservative profile, who are willing to accept lower returns in exchange for greater peace of mind, based on the fact that the risk being assumed is lower.

Variable-Income Funds

With variable-income funds, also known as equity funds, the majority of the capital is invested in variable-income assets (stocks). In contrast to the situation with fixed-income funds, variable-income funds offer higher potential returns because the risk assumed is also higher.

Subcategories are normally established within equity funds, depending on the market being invested in (Spain, Eurozone, USA, etc.), depending on the sectors being invested in (technology, financial, etc.), or depending on other characteristics of the securities being invested in (size of the company, etc.).

Because of their characteristics, variable-income funds are recommended for a more resolute investor profile. Greater risks are assumed during investment, but this can bring with it higher potential returns.

Mixed-Income Funds

Mixed-Income funds diversify the investment by investing part of their capital in fixed-income assets and the rest in variable-income assets. It is especially important to know these proportions, since they will determine how much risk is associated with the fund and therefore the size of the potential returns.

In line with what was explained above, the higher the percentage invested in fixed-income, the lower the risk and the lower the potential returns, while the higher the percentage invested in variable-income, the higher the theoretical risk and potential returns received on the investment.

Mixed-income funds are products designed for all types of investor profiles, from the most conservative to the most resolute, depending on the percentages dedicated to fixed-income and variable-income.

Global Funds

These funds do not have a precisely defined investment policy. For this reason they do not fit into any of the categories described above. These funds are free to invest without first establishing the percentages that will be dedicated to fixed-income and variable-income assets, or the currency these investments are denominated in, or the geographical distribution of the investments.

Because of this, global funds have high levels of associated risk.

 

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Guaranteed Funds

These funds guarantee, up to a specific date, preservation of the capital initially invested. However, not all of these funds guarantee that the investor will receive additional returns. There are two types of guaranteed funds:

  • Guaranteed fixed-income funds. These funds guarantee the capital initially invested, and also tend to guarantee receipt of a fixed return on the guarantee's expiration date.
  • Guaranteed variable-income funds. These funds guarantee the capital initially invested plus a return that is linked (either fully or partially) to changes in stock prices, stock market indexes, currency exchange rates, or other investment funds. If the markets do not evolve as expected, or if certain conditions established in the fund's brochure are not met, the investor will not obtain any additional return.

In general these funds tend to require investors to keep their money invested for a long period of time.

The risk associated with funds of this type is quite low, which means that they are suitable for investors with a conservative profile.

Distribution Funds

These funds periodically distribute dividends to their investors (monthly, quarterly, twice-yearly, or yearly). The amount of these payments will depend upon the dividends distrubuted by the companies in which the fund has invested. This provides liquidity for the investor, but taxes must also be paid on the dividends received.

Accumulation Funds

These funds do not distribute dividends to their investors. Instead, the manager reinvests the dividends that the companies pay out back into the same fund. This means that the fund's net asset value grows progressively.

Other types of funds

There are other types of funds with unique characteristics, such as in relation to their legal structure, liquidity, assets invested in, or strategies applied. These include ETFs, funds of funds, hedge funds, and real estate funds. Some aspects of the more general regulations do not apply to these funds.

It is important to understand a fund's investment policy, since this is what will allow investors to select the fund that is best adapted to their expectations, economic circumstances, and risk profile.

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