Un Investment fund It is formed when several investors join their capital with common objectives, all of them related to obtaining profitability. It is a commonly used modality, since it is a method to access markets that, investing individually, would be unfeasible. Therefore, it is important to know how calculate the profitability of an investment fund.
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What is an investment fund and who participates
An investment fund is a Collective Investment Institution where several people pool their contributions to invest in various financial products. As we mentioned before, it is often used because it opens the possibility of exploring products that, with individual capital, would be impossible for many people.
Three relevant figures are involved in an investment fund:
- Management company, the organization that invests the capital.
- Depositary entity, in charge of administering the activity of the manager and safeguarding the assets.
- Participants (investors who contribute their capital).
Operation and taxation of an investment fund
When an investor chooses the desired fund, he buys the corresponding shares, at a price we call liquidation value. Its calculation is achieved by dividing the net assets of the fund by the number of shares in circulation (at the time the calculation is made), and it is essential for the following section.
The purchase of shares, called subscription, is free for any investor, who can acquire and sell them freely. The greater the purchase of these shares, the more equity the investment fund will have, which will also depend on the fluctuations in the value of the assets it owns.
Investors in a single fund are taxed when they redeem their shares, since a return is generated (equity gain or loss) to be included in personal income tax. The transfer between funds is completely exempt, which makes the funds a very interesting investment instrument.
How is the return of an investment fund calculated?
We are talking about investments, so we must know that profitability is not guaranteed in all cases. However, we can make an estimate based on certain factors, related to past performance, without ensuring that we will have the same success once we enter the fund.
With her, we will know how to calculate the return of an investment fund. To carry out the calculations, we must first obtain the net asset value (NAV) that we saw in the previous section, and apply the following formula:
- Profitability = (Final NAV – Initial NAV) / (Initial NAV) x 100
The result will estimate the profitability that we can currently obtain with this investment fund. In some cases, its calculation can become complex for investors, so it is advisable to go to the sheet provided by the fund itself to study the data it provides on the return on investment.
In these sheets or brochures, the investment fund's return is usually expressed in annual terms. If you want to calculate it individually and express it in this way, you must perform the following calculation:
- Annualized return (1+ (Return/100))^(1/years – 1) x 100
What return can I expect from my investment fund?
Before entering any investment fund, you must bear in mind that it is the management company that is in charge of dividing the capital to invest it in different products. The individual investor does not decide where the money is put and in what proportions it is made, so we have to choose a fund that suits our needs and objectives.
Bearing this in mind, we should also know that investment funds do not usually outperform the indices they use as a reference. We used a great example in the Treasure letters, an instrument that funds usually hold permanently, and whose profitability is quite low.
Therefore, to answer the question in this section, you should know that profitability will depend on the time horizon of the investments, together with the products chosen to invest. An investment fund that works with shares (variable income fund) can generate higher returns than a fixed income one, but the risk will be much higher.
Advantages of having an investment fund
Now that we know calculate return on investment, it is important to note that an investment fund has interesting benefits, so we are going to show you the positive part of opting for this financial tool:
- easy tracking. Updating a portfolio with many securities is quite complex and tedious, something you will not have to worry about in the investment fund, since it is responsible for updating the information.
- Management carried out by experts. Those in charge of carrying out the negotiations and investments are experienced professionals, accustomed to dealing with volatile and high-risk markets.
- little dedication. Investors in a fund do not have to spend time choosing the products in which to invest their money, avoiding stress and saving a lot of dedication to the markets.
- Portfolio diversification. As we pointed out before, an investment fund opens the possibility of access to more expensive financial products, which would be less accessible for an individual investor, promoting a greater saving long term.
- Safety and reliability. There are many legal requirements and limitations to open a fund, in addition to an exhaustive control, so you will not have trust and reliability problems when buying shares.
- Low barriers to entry. The shares are usually of low value, so all types of investors can enter the funds, characterized by their accessibility.
- Tax advantages. As we mentioned in a previous section, investment funds have certain very attractive tax advantages for any investor, being a crucial factor when deciding on this tool.
Knowing the return on investment calculation, we can know if it is interesting to buy shares in an investment fund. Its extensive advantages make it a widely used tool by different types of investors around the world.
Remember that in Euroteide Insurance We have products designed to improve savings and future income of citizens, so do not hesitate to contact us and request personalized advice to find out the best products adapted to your particular situation, such as savings plans.