How investment funds work

An investment fund is a Collective Investment Institution (CII), that is, it is a savings instrument that brings together the contributions made by a number of people (the participants) who want to invest their savings. All of these individual contributions are invested in financial instruments (stocks, fixed income securities, derivatives or a combination thereof).

The fund participant has access to markets that in many cases would not be within his reach if he invested individually. This helps you diversify your investments more easily and efficiently. In this way, the participant is entrusting his savings to a professional (fund manager) who is dedicated to analyzing the market in order to look for opportunities to generate returns to the contributions of the participants.

The participant, in exchange for having a professional management of their investments, must pay some commissions that will be included in the information brochure of the fund and always within the maximum limits established by law. On the one hand, the management and depositary commission are charged directly to the fund (so they detract from the fund’s assets, reducing the profitability for the investor). In some funds, the manager may charge the participant fees directly for the subscription and/or reimbursement of the units.

Key figures in the operation of investment funds

Shareholder: a person who invests in an investment fund.

Management Company: invests the capital contributed by the unitholders in the different financial assets that make up the fund’s portfolio (fixed income, variable income, derivatives, bank deposits …). The fund management company is responsible for preparing a brochure that includes the characteristics of the fund.

Depository Entity: it is in charge of the custody of the assets of the fund and assumes the control of the activity of the manager, for the benefit of the participants.

But really how does an investment fund work?

The operation is quite simple. The investor chooses the investment fund and buys the shares of the same. But at what price? This price is what is known as the net asset value of the fund, which is nothing other than the result of dividing the fund’s assets by the number of shares outstanding at any given time.

Any investor can buy and sell shares, at any time. The purchase of shares is called, subscription; and the sale of shares, reimbursement. Therefore, as investors buy and sell shares, the fund’s assets will go up or down. In addition to this, fluctuations in the market value of the assets in which the fund invests may give positive or negative results, causing the equity to grow or decrease, and consequently, the net asset value of the fund will also suffer upward or downward oscillations.

Taxation of investment funds

One of the great advantages of investment funds is their taxation. The participant of an investment fund will only pay when reimbursing the participation. At that time, a return is generated, which for tax purposes is considered a capital gain or loss and must be included in the taxable income of the personal income tax savings.

In addition, the transfer between funds is exempt from taxation, that is, if you reimburse (sell) the shares of a fund reinvested (purchases) in another fund, the possible capital gains obtained are not subject to taxation. There are two expenses that can be deducted: the expenses associated with the subscription and the reimbursement of shares. Keep in mind that here you can learn more details about the taxation of investment funds.

In summary, investment funds are very attractive instruments for individual investors, since they facilitate access to markets that in other cases would not be within their reach, helping to good financial planning thanks to their tax advantages.