A mutual fund – What is it?

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Mutual funds are financial assets that are managed by a CMC (capital management company) (previously: CIC – capital investment company). These companies collect the capital of a variety of savers and invest it in financial assets by consolidating it into a single asset, the fund. The investments can relate to real estate (real estate funds), raw materials, stocks (equity funds), bonds or government bonds (bond funds or, more often, pension funds). Investment rules and strategies are usually aimed at increasing returns and reducing risks. The investment fund is also known as a special fund because the invested capital is separated from the assets of the CMC. This ensures that the capital is protected from the creditors’ demands.

There are different types of funds. A basic distinction is made between open and closed funds. In the case of open funds, units can be purchased at any time or they can be requested to be redeemed. In this case, the CMC is normally obliged to redeem all fund units at the daily NAV (net asset value), the redemption price. Many mutual funds are also approved for trading on the stock exchange and can be traded there. The range of open-ended investment funds is considerably larger than that of closed-end funds. It’s also interesting that the majority of banks can buy shares in open funds – not only as a one-off investment – but also in the form of a regular savings plan, i.e. a fund savings plan.

Instead, closed-end funds only allow subscriptions to be made during the offering period, i.e. before the fund is operational. They’re referred to as “closed” because units can’t be returned before the agreed investment period has expired and units can’t bet purchased after the planned volume has been contributed. In contrast to an open-ended fund, this means that the fund manager doesn’t issue any new shares in order to continue to satisfy investor demand. Most closed-end funds are primarily investments in real estate, unlisted companies, or loans. Both the open-ended and closed-end funds are regulated by the regulator. Sales documents and investment conditions are drawn up and submitted to BaFin for review and approval.

An equity fund is an investment fund that invests exclusively or predominantly in stocks. The fund can invest globally as an international equity fund or diversify investments by investing in stocks that are focused on different geographic or economic sectors. A pension fund is an mutual fund that invests exclusively or primarily in bonds. The pension fund is therefore also known as a bond fund. These funds get their added value by paying interest and trading the securities they hold. Specific types of funds are mixed funds, which not only invest the clients’ assets in a certain asset class, but also optimise risk diversification. The mixed funds invest in stocks as well as in fixed income securities, however, maximum limits are usually set for the proportion of shares and bonds. In contrast to the other funds, mixed funds definitely contain at least two different asset classes. The mixed funds are also known as balanced funds.

Fund investors receive shares in the fund’s assets for their contribution. The income generated by the investment funds, from dividends and interest, is either distributed to the unitholders or, in the case of accumulation, reinvested, which increases the value of the units. This is to be distinguished from a reinvestment in which the income from distributing funds is reinvested in them. In summary, it’s sometimes so: while an investment in mutual funds is one of the best guarantees for diversifying one’s investments, there is no guarantee of a return or the preservation of the capital invested. The reason is clear: the value of the assets that make up the funds can change based on market trends.

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