The main idea of fund investment is simple: a fund management company pools investors’ money and invests it across a wide range of assets in accordance with the fund’s investment policy. Together, these investments form the investment fund, which is divided into equal fund units.
Even small sums can be invested in an investment fund, with professional portfolio managers ensuring diversification across many securities. Investors can make lump-sum contributions or set up regular savings plans involving monthly transfers.
Key parties in fund investing include:
- Unit holders – individuals or organisations who purchase fund units.
- Custodian – responsible for safekeeping and supervising fund assets.
- Fund management company – manages and administers the fund’s investment activity.
Costs of fund investment
Investing in funds involves costs, which are set out in each fund’s rules. These reduce the returns available to the investor. Fund management companies typically charge a management fee, and they may also charge fees for buying or redeeming fund units or for custody services. However, many companies no longer charge subscription or redemption fees. The fees are used to cover the costs of fund management and administration; anything remaining forms the fund management company’s profit.
Types of funds
Fixed-income funds
Fixed-income funds invest in fixed-income products whose returns depend on short-, medium- or long-term opportunities in fixed-income markets. They may include bonds, with yields depending on the issuer’s creditworthiness.
Average expected returns can be increased by allocating some assets to bond funds (recommended investment period at least 2–3 years). These offer higher returns than short-term fixed-income funds but also have greater value fluctuations due to changes in interest rates.
Equity funds
The long-term return potential of investments can be improved by increasing the proportion of equities in the portfolio. The risks associated with equity investments can be reduced by diversifying across international markets and different sectors, but broad diversification into individual securities only makes sense once the invested amounts are somewhat larger. For smaller investors, equity funds offer a cost-effective way to achieve diversification that would otherwise require significant capital.
Different equity funds vary in their risk and return profiles. They can be categorised by the market value of their holdings, by sector, by investment style or by theme. The recommended minimum investment period is five years.
Balanced funds (hybrid funds)
Balanced funds combine both equities and fixed-income products to achieve diversification benefits. Less common investment targets include real estate, raw materials and other assets. The portfolio manager monitors market developments and adjusts the mix of equity and fixed-income investments within the limits of the fund rules, aiming to emphasise the most attractive asset classes for the market situation. The recommended investment period is 3–5 years.
A common variant is the target-date fund, tailored especially for pension saving, in which the share of equities decreases and fixed-income investment increases as the target date approaches.
Index funds
Index funds track the composition of a chosen index (e.g. equity, currency or commodity index) as closely as possible. Costs are typically lower than for actively managed funds because the portfolio is more stable.
For example, the OMX Helsinki 25 Index reflects the performance of the 25 most traded companies on the Helsinki Stock Exchange, ensuring that no single stock exceeds 10% of the index weight. A fund linked to OMX Helsinki 25 consists of the same shares in the same proportions.