Investment fund

An investment fund, collective investment fund or mutual fund is a collective investment institution (IIC), which consists of bringing together monetary contributions from different investors, natural or legal, to invest in different financial instruments, its responsibility is delegated to a management company that can be a bank or investment services company.

Investment funds are a diversified investment alternative, since they invest in numerous instruments, which reduces risk, depending on the investment fund chosen.

An investment fund is a patrimony constituted by the contribution of various people, called fund participants, managed by a Management Company (investor broker or stockbrokers) responsible for its management and administration, and by a Depository Entity that custody of titles and cash and exercises guarantee and surveillance functions before investments.

When investing in a fund, a number of shares are obtained, which daily have a price or net asset value, obtained by dividing the valued equity and the number of outstanding shares.

The return of the fund is made effective at the time of sale of the shares, (capitalization) which can be carried out whenever desired, except in those funds in which liquidity is limited to certain dates and/or periods.

Mode of operation

The fund is an undivided patrimony made up of the contributions of several investors (although for accounting purposes it is considered a single account) they can be of different nature (individual, group, or institutional; private or state) who have the same profitability objectives and risk regarding the investments they make, delegating its administration to a team of professionals.

There are different types of investment funds or mutual funds depending on the portfolio or investment portfolio chosen by the management company. The managing company defines the value of a share or share, dividing the equity into equal parts, which varies according to the profitability of the fund. In general, they do not expire or require renewal and the money invested can be easily redeemed.

The instruments where it is invested are:

• Cotization values (actions, bonds, etc).
• Money (local or foreign currency).
• Property or Property Affected to an Exploitation (letras mortgages).

Specifically, investment funds offer small and medium-sized savers the possibility of jointly promoting their savings and participating in the capital market, with the criteria and professionalism with which large investors act.

Institutionally, it is constituted by the union of the Management Company and the Depository Company.

Managing company in charge of:

• Establish the Object of Investment.
• Take the Accounting.
• Conduct Legally Required Publications.
• Control the Depositary Society.

Depository company in charge of:

• To safeguard the values and other instruments representative of investments.

The money provided by clients is received by the Depositary Company, and is subsequently used to purchase the assets that are the object of the investment fund. The Management Company and the Depositary must mutually control compliance with the guidelines of the "Management Regulations".

Types of Investment Fund Returns

Based on their performance, they can be divided into two different types of funds:

• Relative, the performance you get in a given time period is referred to an index or Benchmark. These are the traditional funds, which bet on less risky investments, having fewer commissions and specializing in a particular field.
• Absolute, the value of the investment is not related to a Benchmark, the value of this is measured by its monetary value. These funds are expensive, there is no knowledge that it will invest and use all types of investment techniques, such as short positions, use of derivatives, increasing the risk of investment.

Relative performance

They are funds in which it is known what they are going to invest in (stocks, bonds, raw materials, stock market indices), the geographical area where they will invest and if they will focus on a specific market sector (technological, pharmaceutical, etc.)..). To set its value they have a Benchmark that can be referred to a certain stock market index. According to the management we divide them into 2 groups:

• Active management
  • Investment funds traditional managed by brokers, who try to improve the Benchmark by investing according to the criteria of their brokers. The cost of these is usually 2 % of what is invested in terms of commissions. These are products that can take a day to obtain the liquid value.

• Passive management
  • Indexed funds, these replicate an index, buying the values of this with the weights granted, emulates the performance of that index. The costs of these are usually 1 % of what is invested. The risk assumed is lower than an investment fund.
  • Cash pool (FCB or ETF) o Cotized Fund, as the Indexed Funds emulate an index or Benchmark, but also use advanced investment techniques, such as the acquisition of futures, options and derivatives. The cost of these rounds is 0.5 % of what is invested, they have a liquidity as high as the actions and the risk assumed is lower than in an active management fund.

Absolute performance

These funds are managed by brokers, you don't know exactly what they will invest in (they can invest in anything: currencies, commodities, bonds, stocks, derivatives...) and they use more speculative investment techniques. There are the following types of funds:

• Alternative management funds: these funds are dedicated to individuals seeking high profitability and high risk

• Hedge fund or free investment fund: these funds are not directed to individuals, they are for institutions (large estates, other investment funds...). The risk of these is very high as they can be indebted to make high-risk investments (such as short positions), commissions are high and the liquidation volume is calculated every 3 or 6 months. These funds generate controversy over their speculative techniques.

Types of investment funds

Depending on their investment policy, which refers to the criteria that determine what is invested in, how much is invested and in what periods, there are different categories of investment funds. Each of them responds to a specific criterion of search for profitability, these are the main ones:

• Variable income: funds that do not have a guaranteed profitability can report greater benefits in exchange for a higher risk.
• Fixed income: respond to more conservative investments such as public debt or corporate debt. While it is true that such assets suffer less volatility, they are not risk-free and profitability is not guaranteed.
• Joint: combine in the same investment fund mixed investments between fixed and variable income.
• Absolute return: these funds do not follow a specific benchmark index and are intended for the preservation of the value of capital.

Income stabilized investment funds

Stabilized income funds are those that, unlike traditional variable income funds, are intervened by a stockbroker who maintains the floatation of resources in the most profitable instrument.

The latter generally buys and sells to maintain performance, using a market behavior forecasting program.

Stabilized income funds are extremely complex to operate and are mostly managed by computers that perform prediction, purchase and sale operations in milliseconds.