About investment funds
Learn about how investment funds work and their characteristics
The concept of an investment fund
Investment funds are a savings type in which many investors can invest their savings at the same time, sharing the risk and costs. The money accumulated in these funds is managed by the fund manager’s professionals, who have considerable expertise and market knowledge. Thanks to this expert asset management and the size of the assets accumulated in the funds, investment opportunities are available in assets that are not or only with difficulty accessible to individual savers.
The operation of the funds is rigorously and multilaterally controlled, so all investors can be sure that their savings are invested in exactly the assets that are specified in the fund’s investment policy. The funds managed by OTP Fund Management Ltd. are securities funds, i.e. investors’ savings are invested in securities.
Key facts about investment funds
Why invest in an investment fund?- Risk sharing: perhaps the most important argument for funds is risk sharing. Because even buying a single investment fund can give you access to a portfolio of hundreds or even thousands of individual securities, professionally constructed, spreading risk across multiple assets, multiple issuers, multiple geographical regions, multiple industries, something that would take enormous effort to achieve as an individual investor.
- Flexibility: open-ended, continuously traded investment funds can be bought at any time, and the savings invested can be redeemed at any time, without having to adhere to pre-defined commitment periods or maturities. In addition, the amount invested is flexible, meaning that it can be increased or decreased by any amount on any given trading day, making the funds perfect for regular, smaller savings.
- Simplicity: When you choose an investment fund to invest your savings, all you have to do is buy units in the fund. With this simple transaction, you effectively hire a team of experts to take all the burden of investing off your shoulders and place your savings in a wide range of securities from all over the world. Of course, it is not only possible to place money, but also to redeem investments in a simple transaction, without having to adjust to maturities or commitment periods, and units can be redeemed on any trading day.
- Cost-effectiveness: investing in a fund means no additional costs other than the account management fee for your securities account and the cost of buying and redeeming securities. These may vary from one distributor to another, but in all cases they represent fixed, low costs. All other costs (e.g. fund manager’s fees, administrative and operating expense, transaction fees, etc.) are deducted from the fund’s assets.
- Expertise: investment fund managers have decades of professional experience in the field of investments, they have access to market information that individual investors do not have or only receive late. Their work is supported by OTP Fund Management Ltd.’s own analysts, computer algorithms and various trend analysis software.
You can join the funds by purchasing units. The unit will represent our ownership of the fund. In order to determine how much of the assets accumulated in the funds and invested in different securities is allocated to a single unit, we first need to know the assets of the fund. These assets are called the net asset value of the fund. ‘Net’ refers to the assets of the fund after deduction of all operating expenses related to the fund from the total value of the assets in the fund and the fund’s assets (the value of securities sold but not yet collected). If we divide this by the number of units in circulation, we get how much of the assets are allocated per unit. This value is called the net asset value per unit, or the fund’s price. In the case of funds, this is the single price at which units are bought and redeemed. As an investor, all we need to do is redeem our units at a higher price than the one at which we bought them. The difference between the two rates will be the return on our investment.
How and what causes the price of an investment fund to change?On the one hand, the fund receives interest, coupons, dividends on the securities in its portfolio, depending on their nature, which increase the fund’s assets, and on the other hand, another important source of asset growth is the capital gains on the securities in the fund. Every day, the fund manager evaluates the funds, calculates the net asset value and has to take into account the change in the price of each security, even if it has not sold the security from its portfolio. Of course, the value of the underlying securities may fall while they are in the portfolio, in which case the price of the fund will also fall. This means that investment funds do not have a guaranteed return or a pre-declared interest rate; the price of the fund is influenced by the market price of the securities it holds. The future development of the fund’s share price therefore involves a risk that we have to assume when investing in the fund.
How can the risk of an investment be reduced?It is relatively easy to mitigate the risk from changes in the price of funds. Each fund has a minimum recommended investment time horizon which exchange rate fluctuations are smoothed out. It is important to always choose a fund with a recommended investment horizon that matches your financial goals. As we also want to achieve our financial goals at different times, it is not advisable to choose a single fund to invest our savings in, but to build a multi-element portfolio recommended for different time horizons. This is also a big step towards reducing risk, as it allows us to spread our investments across several funds, several asset classes and several time horizons.
What types of investment funds can you choose
from?
Based on investment time horizon
Open-ended investment fundsYou can join or redeem your savings in open-ended funds on any trading day. These funds are usually set up for an indefinite term and you can decide how long you want to use them and keep your savings. Of course, it is always a good idea to stick to the investment horizons recommended by the fund manager, so that your investment has a good chance of delivering the expected performance.
Closed-ended investment fundsIn contrast, you can only join a so-called closed-ended fund during the subscription period preceding the fund’s launch. These funds are usually set up for a fixed term, i.e. they have a specific maturity for which you have to keep your savings in the fund. Of course, if you still need the amount invested during the term, you can sell the closed-ended funds via a stock exchange order, but here it is the demand at the time that will determine the worth of your investment, not its value. Therefore, if you have chosen a closed-ended fund, it is advisable to hold your investment until maturity.
By asset category
Money market fundsWithin securities funds, the simplest product group is made up of money market funds, which invest in various money market instruments, i.e. bank deposits and short-term government bonds and notes.
Bond fundsA separate group is bond funds, whose portfolios include government and corporate bonds and interest-bearing instruments.
Mixed fundsMixed funds mix bonds and equities in their portfolios.
Equity fundsThe portfolio of equity funds consists of shares issued by companies.
Commodity fundsCommodity funds give investors access to the world of commodity exchanges and commodity market instruments.
Absolute yield and derivative fundsAbsolute yield funds, which are not tied to a specific asset class but can move their assets freely between asset classes depending on market events; and they invest in securities not only directly but also through derivatives.
Closed-ended fundsClosed-end funds can be bought during a pre-defined subscription period and have a pre-defined maturity compared to open-end funds. If the fund is capital protected, the capital invested will be repaid after the maturity or a predetermined holding period in any case. If the fund also promises yield protection, the fund will also pay the pre-fixed yield after the maturity date.
Funds can also be grouped according to the type of asset in which they invest investors’ savings, i.e. the fund’s assets.
OTP Fund Management Ltd. invests the assets of the funds exclusively in securities, i.e. it manages securities funds. (There
are also property funds that invest in various commercial and residential properties, managed by OTP Real Estate Fund Management
within the OTP Group.)
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