Mutual investment funds are among the most affordable and stable financial instruments present on the Russian market. They allow any interested citizen to receive income from investing in certain assets. What are the specifics of these financial institutions? What income can I expect when working with mutual funds?
What is a mutual fund?
What is a mutual fund or unit investment fund ? This is a special form of investing in the collective participation of investors. It is supposed to transfer finance to the trust management of a special organization and the subsequent profit if the work of partners is successful.
Investment in mutual funds is carried out through the purchase of certain shares - âsharesâ. At the same time, investors remain their owners, the management company only carries out the necessary financial transactions.
What do mutual funds give?
The main goal with which investors go to mutual investment funds is to make a profit. Mutual funds can earn even for those investors who do not have significant experience in investing - the management company takes on the entire amount of relevant work. The specialists of this organization, relying on their skills and competencies, find the best options for investing money, which they manage. The management company works for a percentage of financial transactions carried out using the capital of investors.
Legal status of mutual funds
What legal status do mutual funds have? It can be noted that they are not legal entities. At the same time, such should be the management companies of mutual investment funds. Mainly, such a difference in legal statuses is due to the fact that both subjects of legal relations - mutual funds and the criminal code - do not overpay taxes. Under the scheme of their interaction under consideration, only that revenue is received that is received by depositors during the sale of shares, as well as statutory fees from the proceeds of the Criminal Code as a business entity.
How funds work
The mutual fund operates on the basis of internal rules. They record the conditions under which investors transfer financial assets to the management company. The relevant organization must have a license confirming its right to manage property that belongs to mutual funds. This document is issued by the Federal Commission for the Securities Market. One management company can create several mutual funds.
As soon as the relevant structure receives a license from the state, it must conclude several agreements - with the depository, registrar, independent appraiser, and also the auditor. The rules that we talked about above should be entered into the registries of the Federal Securities Commission. Also, registration in the relevant state structure is subject to a special document - the Prospectus for the issue of shares. Once the management company has settled all the formalities, then it can begin financial activities.
The first stage of UK activity is the initial placement of shares. In the course of this area of ââwork, the UK should raise a minimum amount of capital. If this was not possible, then the mutual fund should be liquidated, and the funds transferred to the depositors.
Fund control
The activity of mutual funds is subject to state control. The main body that implements it is the Federal Securities Commission. So, the legislator in the process of developing measures to regulate the activities of mutual funds has formed some rules to which the relevant investment structures must comply.
For example, assets owned by mutual funds must be managed by one company and stored in another. At the legislative level, norms have been established that require detailed disclosure of information about investments. Mutual Fund reports also require a high degree of detail.
Is income guaranteed?
The specifics of the mutual funds does not guarantee income for investors. The company managing the mutual investment fund is obliged to redeem the units as soon as the investor so requires, but there are no legislative requirements regarding profitability in relation to the structures in question. That is, despite the fact that mutual funds are positioned as financial instruments for investors who do not have much professional investment experience, it is assumed that capital owners are aware of all the associated market risks.
The essence of shares
Let us consider in more detail what investment units are. When a depositor transfers funds to a mutual fund, he, in fact, acquires a share in the organization. Thus, the investment share of a unit investment fund is a personified security, which indicates that its owner is among the owners of the mutual fund property. This citizen has the right to expect that the UK will properly manage the investment fund. He also has the right to compensation in the event that the trust deed is terminated.
A unit does not have a minimum value. Its monetary value is expressed in the price of the fundâs net assets. That is, the cost of one share taken is a multiple of the total amount of the unit investment funds divided by the number of shares. The price of the respective shares varies depending on the results of the investment. A share cannot also be considered an issue type of securities, like stocks. Moreover, the corresponding type of financial instruments cannot be derived from units. The total number of shares in the mutual fund capital is not limited by law.
Types of funds
Let's consider what UIFs are. There are several criteria for their classification. According to one of the most common, mutual funds can be divided into 3 types: open, closed, as well as interval. What is their specificity?
An open-ended mutual fund is a financial institution that is considered the most common in the corresponding category. Their main feature is the free purchase and sale of shares. The amount of capital, as well as the number of investors are not limited. The type of mutual funds under consideration is characterized by investing in assets that are highly liquid.
Closed mutual funds are characterized by the fact that they sell the formed shares at the establishment of the fund. These structures do not redeem units, apart from precedents, when a depositor makes claims to the rules of the Criminal Code. Corresponding funds are formed, as a rule, for a fixed period, which is agreed upon with investors in advance. Closed-end mutual investment fund is a structure that often has industry specialization. For example, its activities may be related to the real estate or innovation market. However, for example, the âFirst Startup Mutual Fundâ is open. Although his industry specialization is just the same innovation.
There are interval mutual funds. The peculiarity of their activity is that the sale of shares, as well as their redemption, is carried out at fixed intervals. At the same time, interval funds mainly work with stocks. Therefore, in the potential, such mutual funds (reviews of many investors confirm this) can be more profitable than, for example, open-end mutual funds.
There is another common criterion for the classification of mutual funds - the scope of investment. Thus, the âFirst Startup Mutual Fundâ, as we noted above, carries out activities in the field of innovation. But there are also mutual funds that operate in the bond market , mortgages, real goods, in the industry.
For example, funds operating in the bond segment invest money mainly in the relevant securities issued by the state, corporations, and work with bank deposits and currency. Their assets, as a rule, are not formed at the expense of shares. Mutual funds that fall into this category are considered by many analysts to be not the most profitable, but very reliable, due to the nature of bonds, which require issuers to pay the appropriate dividends to depositors by their issuers.
In turn, mutual funds characterized by a risky investment strategy are those that work with stocks. But at the same time, the yield in them may be incomparably higher than in funds investing funds in bonds. It can be noted that within this category of mutual funds there are additional reasons for the classification of institutions. So, there are funds specializing in investing in stocks of large firms - âblue chipsâ, and there are those that prefer to invest in the assets of new companies.
There are mixed mutual funds. It is difficult to characterize them as leading activities in a particular segment. But at the same time, many of them combine the best qualities of funds specializing in stocks, namely high profitability and at the same time the characteristics of mutual funds invested in bonds, in particular stability. Investing in such institutions is recommended for investors for whom the corresponding financial market is completely new.
Functions of mutual funds
It will be useful to consider what functions are characteristic of mutual investment funds. They can be classified into social and economic. The functions of the first type include:
- giving citizens the opportunity to earn in addition to the usual sources of income - salaries, deposits, even if they do not have specialized knowledge in the field of investment;
- promoting financial education of the population (over time, the investor begins to understand the laws of the market that affect the success of investments);
- job creation for financiers, as well as specialists in related fields, lawyers, programmers, secretaries, and sales managers.
Among the basic economic functions of mutual funds:
- increase in capitalization of various business sectors, financial market, which, ultimately, contributes to the growth of the country's economy;
- assistance to entrepreneurial initiatives - both direct (encouraging financiers with experience to open their own businesses in the form of management companies), and indirect (forming investors' preferences for earning by improving knowledge and skills in the field of investment);
- providing additional tax revenues to budgets of various levels - due to deductions from the income of investors, as well as fees from the Criminal Code, provided for by law.
Now consider the advantages and disadvantages of investing in mutual funds.
Advantages and disadvantages of investing in funds
Let's start with the advantages of working with investors with mutual funds. The most important advantage that any mutual fund has is that experienced experts manage the capital. If this criterion is not met, then the management company simply will not receive a license from the Federal Securities Commission. This department puts forward certain requirements for the professional qualifications of the owners of the authorized capital, in the prescribed manner certifies them. Mutual funds are usually opened by investors with experience, confident in their abilities and skills.
Investments in the appropriate type of funds are very affordable. The minimum amount of investments in most mutual funds is about 2-3 thousand rubles, sometimes even less. The expected return on them can be comparable to the profit from depositing with banks on the conditions established for very large deposits - from several hundred thousand rubles.
Investing in mutual funds in terms of security in terms of a number of criteria is comparable to the same bank deposits, which are characterized by very high state security. Control over the activities of the funds is carried out by a separate department, and the procedures that comprise the activity of mutual funds require very strict monitoring. Strict state supervision is supplemented by legislative requirements, for example, those that imply the obligation of the management company to place funds in a separate depository.
Among the significant advantages of mutual funds are soft taxation. Current operations are not subject to fees. Payment of necessary taxes is required only when the investor sells a share. In turn, the terms of the Criminal Code for commissions are usually quite acceptable for investors - usually 3-4% of the capital turnover is taken.
Mutual Funds also have disadvantages. First of all, a mutual fund cannot guarantee income. Moreover, the success of the company in the past does not directly determine the high likelihood of a repeat of the investment results. It often happens that a promoted and popular mutual fund, and quite rightly received such a status, does not choose the most optimal investment strategy, as a result of which investors are left with nothing. It may also be due to new market conditions. In addition, even if the activities of the management company are unprofitable, the client nevertheless needs to pay with it for services through the deduction of a commission.
Among the noticeable shortcomings of mutual funds is the relatively low rate of withdrawal of funds by the investor. As a rule, an investor has to wait for cash withdrawal for about a week. Moreover, he may have expenses associated with the need to issue special investment certificates.
Mutual fund experts
What are the opinions of experts regarding the activities of Russian mutual investment funds? Despite these shortcomings, analysts generally classify mutual funds as reliable, transparent and affordable investment tools. Experts note that the activity of mutual funds is characterized by a very high degree of openness, due not only to the requirements of the law, but also to the customer focus of these institutions.
The most important thing, according to experts, is that the management of a mutual fund is carried out by professionals. There are financial instruments that suggest that the yield will depend directly on the actions of the investor. In the case of mutual funds, they can entrust their capital to experienced people.
Experts note that investors generally trust mutual funds. So, for example, at the end of the crisis of 2008-2009, when the expected outflow of capital from mutual funds occurred, many citizens began to return to interaction with funds as soon as possible. The dynamics of investment in many mutual funds exceeded the indicators recorded before the crisis.
How much can you earn on mutual funds?
What can be the expected value of return on investment in mutual funds? As we noted above, funds are divided into several categories - some, due to the desire to invest in shares of dynamically growing businesses, may be more profitable, others that prefer to invest in âblue chipsâ provide less profit. Moreover, in the first case, the probability that the investor will be left with nothing is, of course, higher.
It is extremely important how skillfully the management company will approach investment issues. Mutual funds that are opened by experienced market players are generally more profitable and more stable than those founded by newcomers - despite the fact that their qualifications have strict requirements at the level of the state regulator.
At open-end mutual funds specializing, for example, in bonds, the average yield is about 10-12% per annum. Funds that invest in stocks can provide more profit - about 20%, sometimes more. Closed mutual funds in terms of profitability occupy a middle position between them. According to some public data, the âStartups Unit Fundâ recorded a profit of several tens of percent per annum. But it depends on how much the main asset of this mutual fund is growing - the capital of innovative companies. Judging by public data, some Sberbank mutual funds have a yield of more than 30% per annum.
Experts in the field of financial markets recommend working with several mutual funds at once, thereby diversifying investments. In potential, it can also increase profits. It makes sense, analysts believe, to compare mutual funds in terms of commissions and other expenses that are not directly related to obtaining investment revenue. You can also pay attention to the characteristics of the Criminal Code from the point of view of the founders. If the management company is opened by a major player in the market, as is the case with Sberbank mutual funds, then its reliability is higher than that of companies that have recently appeared in the corresponding segment. Thus, an integrated approach to assessing the prospects of cooperation with a particular fund is optimal for the investor.
Prospects for mutual funds
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