Fixed income, variable income, mixed funds, guaranteed funds, accumulation funds… When you start exploring the world of investment funds, it is easy to get lost among so many names.
To understand them, it is worth asking two questions: What the fund invests in and what it does with the returns it earns. These two characteristics allow you to distinguish a good part of the products you will find and help you interpret their possibilities and risks.
Additionally, classifications can be combined. A fund can invest in stocks and, at the same time, be accumulation. Each term describes a different aspect of its operation.
How does an investment fund work?
A fund pools money from different investors to invest jointly. The management company decides how to distribute this assets, respecting the investment policy established in the product documentation.
When investing, you acquire shares: small parts of the fund’s assets whose value changes as the portfolio evolves. Therefore, the result of the investment can be positive or negative.
Before contracting, it is advisable to know the assets you can buy, the risks you assume, their commissions and the conditions to recover the money. This information allows us to value the product beyond its commercial name.
Fixed income funds
Fixed income funds invest in debt instruments, such as corporate bonds or public debt. Its behavior depends, among other factors, on interest rates, asset terms and the solvency of the issuers.
Although the term may suggest stability, fixed income can also generate losses. If market conditions change, the price of securities held by the fund may decline.
For example, when interest rates rise, bonds previously issued with lower interest rates often lose their attractiveness and may reduce their price.
Not all of these funds have the same risk. A short-term debt portfolio with high credit quality is different from one that invests in bonds from issuers with financial difficulties. The category guides, but its composition must be examined.
Variable income funds
These funds invest primarily in stocks. Within this category there are products focused on certain countries, sectors or company sizes.
A fund of American technology companies, for example, has a different exposure from another that distributes its investments among companies in different sectors and markets.
Equities usually present greater fluctuations and offer greater potential returns in exchange for assuming more risk. That potential should never be confused with a promise of benefits.
Mixed funds
Mixed funds combine fixed income and variable income investments. To understand how it works, you have to check how much is allocated to each component and what margin the manager has to modify that distribution.
Imagine two hypothetical portfolios: one invests 20% in stocks and another 70%. The two are mixed, but their exposure to stock market movements is very different.
In addition to the percentage of equity, the quality and term of the debt matters. The “mixed” label needs to be accompanied by a reading of the portfolio and its investment limits.
Global funds
Global funds have an investment policy that does not fit into the previous categories. They can have wide freedom to allocate wealth between assets, markets and currencies.
That flexibility requires attention to the fund’s strategy and limits. The name “global” is not enough to know its diversification or the risk it is assuming at all times.
Guaranteed funds
Guaranteed funds offer a guarantee on all or part of the investment, depending on the conditions of the product and for a specific date.
Among those that guarantee the entire capital, there are two common types:
- Fixed performance: They contemplate the return of capital and a previously established profitability.
- Variable performance: They guarantee capital and offer the possibility of obtaining a return linked to certain assets or indices. That additional profitability may not occur.
The moment to recover the money is essential. If you refund before the guarantee expires, you may suffer losses and face a refund fee.
Some products have liquidity windows to exit without that commission. However, these windows do not imply that the guarantee applies: the refund is made at the corresponding value on that date.
Distribution or distribution funds
Another way to classify funds is to look at what they do with their returns.
Distribution or distribution funds make payments to unitholders in accordance with their distribution policy. This allows you to receive money without having to request the redemption of shares each time.
The amount and frequency of payments depend on the conditions of the product. Therefore, before counting on this income for certain expenses, it is advisable to check how they are established and whether they can vary.
Accumulation funds
Accumulation funds keep returns within the fund itself rather than distributing them among its unitholders.
The difference can be understood with an example: given a hypothetical return of 100 euros, a distribution method could distribute it according to its conditions, while an accumulation method would keep it invested.
This does not mean that the value of the fund will continually increase. Even if returns are reinvested, portfolio investments may decline and cause losses.
Accrual and distribution describe how income is treated; These terms alone do not determine the risk of the assets in which the fund invests.
Other types of investment funds
There are also exchange-traded funds or ETFs, funds of funds, hedge funds and real estate funds. These names respond to characteristics of its structure, its investments or its operations.
Therefore, knowing the type of product is only the starting point. To compare them, you must review their specific conditions and avoid assuming that they all work the same.
What to check before choosing a fund
Once the category has been identified, the next step is to check if the product fits your circumstances. These questions help organize the decision:
- What do you want to invest for? Define the objective you pursue with that money.
- When might you need it? Relate your term to the conditions of the fund.
- What losses could you take? Take into account both your tolerance and your financial capacity.
- How much does it cost? Review commissions and expenses.
- How can you get the money back? Check the deadlines, possible fees and restrictions.
Reading the documentation before contracting allows you to know the subscription and refund conditions. If any characteristic is not clear, resolving it before investing is part of the decision.