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Investing: funds
Funds offer investors a variety of investment opportunities. But what are investment funds and how do they work? Learn about the different types of funds, their benefits and their tax implications.
Content:
What is an investment fund?
An investment fund is the pooled wealth consisting of the deposits of many individual investors. Depending on the fund’s orientation and guidelines, the fund’s assets are invested by fund managers in stocks, bonds, real estate funds and other investment opportunities. As a fund investor, you own shares in the total assets of the fund in the amount of your capital investment. You can systematically invest your assets to take advantage of the opportunities in the financial markets.
Depending on their investment strategy, investment funds are subject to price fluctuations similar to stocks and bonds.
The cycle of investment funds: How funds work
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With investment funds, investors benefit in many ways: through protection, transparency, liquidity, diversification and professionalism.
Actively managed investment funds are special assets, meaning they are legally separated from the assets of the fund company. The fund assets are therefore not included in the balance sheet of a fund provider and remain separate from the bankruptcy estate in the event of insolvency of the issuer of the securities or the custodian bank.
Investment funds are transparent. Investors know how and where their money is invested. The costs and fees are also disclosed. This is the foundation for long-term investor confidence.
As a rule, there are no waiting times when investing in funds. You can generally sell or increase your fixed assets, the amount and investment period of which you choose yourself, either entirely or partially at any time. Last but not least, fund issuers are legally obliged to redeem shares.
With investment funds, investors do not put all their eggs in one basket. Depending on the investment orientation of the fund, the money is distributed across a variety of securities (such as stocks, bonds, real estate) and across different investment markets as well as currencies. This broad diversification (Diversification) reduces your overall risk.
Fund managers manage and oversee the fund. They continuously evaluate market events and make appropriate investment decisions. However, they do not act at their own discretion, as they are bound by strict and clear investment guidelines. Not least, they can draw on expert knowledge and a disciplined approach – and have access to investment opportunities that are difficult or even impossible for you as a private investor to access.
Investors can choose from a wide variety of funds. There is a suitable investment fund for practically every investor segment and for every investment goal and need.
Investment funds can generally be divided into six main categories: money market funds, bond funds, equity funds, real estate funds, fund of funds and mixed funds.
Investment strategy: actively or passively managed investment funds?
With investment funds, a distinction is made between actively and passively managed funds.
Actively managed investment funds are generally more expensive than passive ones. Fund managers analyze and select the investments, which is reflected in management fees. They make this effort because they want to achieve a higher return than their benchmark index. In other words, they are trying to outperform the market.
Passively managed investment funds are index funds and exchange-traded funds (ETFs). Both reduce management to a minimum by tracking a specific market index. This process is automated, so fund managers are not involved. ETFs are traded on the stock exchange. For index funds, buying and selling is only possible through the respective fund provider.
As an investor, you should not focus solely on costs but consider several aspects when selecting your securities. However, fees do affect your returns. It is therefore important to understand what costs you may incur. Last but not least, costs can provide a point of reference for comparing different funds.
The total expense ratio (TER), for example, gives you an indication of the annual costs. This key figure includes, in addition to management and marketing fees, commissions to the custodian bank, distribution costs and fund audit costs. TER is indicated as a percentage of the average managed fund assets.
Even more meaningful is the “Total Cost of Ownership,” or TCO for short. TCO quantifies the total costs. This means that, in addition to TER, order fees and costs for rebalancing are also included.
However, both fund selection and cost comparisons are only of limited value, as the investment funds with the lowest costs are not automatically the most successful. It is therefore advisable to involve an investment specialist. This way you can ensure that the fund selection matches your investor profile and investment goals.
It is worth checking the tax implications of your investments because taxes can significantly reduce your net return.
From a tax perspective, investment funds are transparent. This means that fund investors can clearly see which returns are taxable and how to declare them in their tax return.
The market value of your fund shares is subject to cantonal wealth tax. The year-end rate is generally decisive.
Distributions of your investment income are in turn subject to federal and cantonal income tax. In the case of investment funds domiciled in Switzerland, distributions are subject to withholding tax (Swiss withholding tax, capital gains tax). Swiss private investors can reclaim the withholding tax by correctly declaring the corresponding income in their tax return. The withholding tax will then be credited against the income tax owed or refunded. It should be noted that income that is not distributed but reinvested in the fund (accumulating funds) is also subject to tax and must be declared. Capital gains are not taxable and therefore capital losses are not tax-deductible.
Special rules also apply to the taxation of investment funds. Your tax domicile is decisive for the taxation of your investment funds and the reclaiming of withholding taxes. Special funds such as real estate funds with direct property ownership, hedge funds and funds with foreign domicile, etc. may be taxed differently from the aforementioned rules.
It ’s not easy to keep track. If you are unsure, it is best to rely on the expertise of a professional.
Can investment funds also lead to losses?
Investing in investment funds opens up long-term earnings opportunities but is also associated with a certain degree of risk, as investment funds are exposed to the fluctuations of the financial markets to varying degrees, depending on the investment strategy. You can counteract this risk by investing gradually with the ۶Ƶ Investment Plan. A long-term investment horizon is also crucial for investment success.
Keep your expectations realistic. Discuss your risk profile with your investment expert – and work together to develop your investor profile. Your investment strategy is based on this, which in turn also includes your investment objective.
Serious and successful investing requires disciplined asset management – and thus a longer-term investment horizon. As a fund investor, you can mitigate certain risks. Investment funds invest diversely. By not putting all your eggs in one basket, you reduce the overall risk.
Another advantage is the legal protection for investors. Last but not least, fund managers take over the management of the fund’s assets. Your money is thus in professional hands.
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