What are mutual funds?
Mutual funds are investment instruments managed by asset management companies. Asset Management Companies invest the combined sums of several savers, as a single asset, in financial assets or real estate, following various rules to reduce risks.
Each fund is divided into shares, subscribed by savers and guarantors of equal rights. There are two ways to subscribe to the shares: by paying the amount in a single solution through a capital investment plan (PIC) or by periodic payments until a certain amount is reached, through a capital accumulation plan (PAC).
The collective asset management activity of a fund is divided into two phases.
- Fund establishment: first of all a fund is established and promoted with the consequent coordination of relations with participants (subscriptions, reimbursements, etc.).
- fund management: at a later stage, real management is carried out, which includes a series of decisions to arrive at the composition of a portfolio. The activities can be carried out by one or more asset management companies. If management is plural, the SGR that sets up the fund is called the “promoter”.
The management activity is carried out by the managers, a team of SGR employees. Their task is to implement the general directives received from the board of directors of the SGR and, based on these, to choose the financial instruments to be sold.
The choice can also be delegated to another company for the entire portfolio of the fund or for a part of it. In this case, the third company must be authorized to manage – in Italy, it can be an asset management company, a SIM, or a bank. Here too, the SGR’s board of directors is responsible for providing general directives and supervising the work of the delegate.
Mutual funds are then distinguished based on a series of criteria, which must be carefully examined when choosing the type of fund in which to invest. These features are:
- investment purpose and policy;
- risk-return profile;
- costs;
- past performance.
Types of mutual funds: which one to choose?
The types into which mutual investment funds are divided are linked to various factors, such as the financial markets.
Based on the instruments in which they invest we will therefore have:
- equity funds: focused on equities;
- bond funds: which invest mainly in bonds and government securities;
- balanced funds: focused on equities and bonds, with variable risk percentages from fund to fund;
- money market funds: operating in the short-term money market.
If, on the other hand, we take the subscription and redemption method as a criterion, we can classify the funds into:
- open-ended funds that allow you to subscribe to units or request redemption at any time;
- closed- end funds for which units can be subscribed only during the offer period and redemptions can only be received at predetermined deadlines.
The last type is that of harmonized or non-harmonized funds: in the first case, investments are made mainly in listed securities, and a series of constraints are envisaged to protect savers and contain risks; non-harmonized funds, on the other hand, are subject to less rigid rules, have greater freedom to invest the assets raised and potentially greater risk.
To choose a suitable fund for our investments, it is necessary to read and deliver the KIID (Key Investor Information Document) to the subscriber and pay close attention to the key characteristics of each fund.