Types of Investment Funds

Investment funds, as CISs, are regulated in the CIS Law and its development regulation. This legislation classifies investment funds under the following criteria:

• Financial investment funds, distinguishing between those that comply or not with Directive 2009/65/CE (UCITS IV). The main characteristic of these funds is that investment is directed towards financial instruments. Among the funds that do not comply with UCITS IV are: hedge funds, and the Funds of hedge Funds.
• Non-financial investment funds. The law classifies in this category every fund that cannot be catalogued as a financial fund. Mainly, real estate investment funds.

Out of this legal classification, the financial market makes a more exhaustive classification of the investment funds. Mainly, by cataloguing them according to the investment policy they apply or the assets they invest in.

Throughout this publication, we make a brief description of different categories of investment funds, according to their investment vocation.

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Money Market Funds

Money market funds are those whose main characteristic is its similarity to money. That it is to say, they are funds that invest in very liquid assets. This allows the fund to transform their assets into money in a short period of time. They are very liquid funds with low risk exposure. As a consequence, if the risk taken is low, the profitability derived from that investment, in general, is low too.

This type of funds, are similar to money in relation to their low variability and flexibility. That said, they do not invest neither in equity, nor in currencies or subordinate debt. Generally, they make short-term fixed-return investments, either public or private. As an example, treasury bonds or corporate promissory notes.

Index Funds

Index funds are those created with the purpose of replicating an index in the market. The fund invests in every asset of which the index is composed. This way the fund is able to replicate the index and fluctuate according to it. They are able to reproduce or replicate any index taken as a reference in the market. These types of funds have a clear advantage, and is a lower management cost for the investor.

It is true to say that there are two ways of managing funds: active and passive management. While the active management aims to outperform the market, passive tries to replicate it. Active management is characterized by an analytical work in order to find the best opportunities. However, passive management does not analyze, does not look for opportunities and does not select. It invests in indexes by replicating them. It eliminates managing costs, which makes investors fees cheaper.

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European passport for ESISs, IICS and SGIICs

The European Passport is talking about authorization to market certain financial products within the territory of the EU. In addition, it is necessary to differentiate the type of financial product to be commercialized. The process for obtaining the authorization / European Passport is different depending on the case. Thus, it is necessary to speak separately of authorization for ESIs, IICs and SGIICs.

Guaranteed Investment Funds

Guaranteed investment funds are those who guarantee the total of partial return of the investment made. Also, they guarantee a minimum profitability in the fund’s prospectus. The minimum profitability that is guaranteed, classifies funds in two types:

• Guaranteed Fixed Yield: It ensures the repayment of the investment plus a fixed minimum returns.
• Guaranteed Variable Yield: It guarantees the repayment of the investment plus a minimum return that depends on some pre-stablished circumstances. Circumstances that are generally related with the evolution of a certain index such as IBEX35

It is important to highlight the fact that the guarantee is guaranteed only at maturity. That is to say, if it is refunded before the maturity it will not benefit from the guarantee. Early redemption fees for these funds are often high.

Absolute Return Investment Funds

The main objective of absolute return investment funds is to obtain the maximum return with the least possible risk. These funds do not follow any index, as this would mean linking the profitability to the evolution of the market. In order to avoid linking the returns to the evolution of the market, they stablish a maximum risk. They adjust their investments to that level of risk. In order to do that, they look for investments from which they obtain a higher return within this level of risk. The purpose of these funds is to obtain a positive return, not to guarantee it.

Equity Investment Funds

These types of funds have an investment strategy focused towards on investing a minimum of 75% in equity. Equity means variable-income investments, thus it can translate into shares or investment funds. Within this equity investment funds, we can find different categories:

• Euro Mixed Equity Investment Funds: those funds whose investment policy consists on the investment in equity and debt (Balanced Funds). Even tough, their equity exposition must be between 30% and 75%. Just a maximum of 30% of the investment can be placed in companies based outside of the Eurozone. Including exposure to currency risk.
• International Mixed Equity Investment Funds: As well as the previous ones, they have an equity exposure between 30% and 75%. In this case, investments in companies based outside the Eurozone can go up the 30%.
• Euro Equity Investment Funds: Funds whose investment policy consists on having an exposure to the equity risk of at least of 75%. Having at least 60% of their investment placed in assets issued by companies that belong in the Eurozone. Furthermore, these funds have their currency risk exposure limited in a 30%.
• International Equity Investment Funds: investment in equity is at least the 75% of their assets and there are not labelled as Euro Equity.

Debt Investment Funds

Debt investment funds are characterized by the fact they do not any kind of exposure to equity. The main fixed-income financial products are bonds, debentures or promissory notes. Within debt funds, there are different categories:

• Fixed Income Funds: Funds whose investment policy consists in the fixed income investment. These funds are characterized by the absence of equity, they cannot invest any asset of the fund in this kind of assets.
• Euro Mixed Fixed Income Fund: Funds whose main characteristic is investment in both fixed income and equity (Balanced Funds). The exposure in equity cannot exceed 30%. They cannot invest more than 30% in equity issued by entities outside the Eurozone.
• International Fixed Income Fund: Funds whose main principal characteristic is the investment in both fixed income and equity (Balanced Funds). The exposure in equity cannot exceed 30%. Also, they can invest more than 30% in equity issued outside the Eurozone.

Conclusions

The financial market offers investment possibilities for every different type of investor. That is why product classification is relevant. Risk aversion or the need for immediate liquidity are key aspects when choosing. Knowing what types of investments funds exist, and the assets behind them is important for choosing the product.

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