Investment Funds Definition | Types of Free Investment Funds:- Recent regulatory changes have broadened the supply of funds that investors can acquire in our country. Among the new types, free investment funds (IDFs) and hedge funds (FFIL) stand out. These products are managed through strategies and techniques that may be innovative for many investors, and present characteristics and risks unknown until now for the world.
The funds of free-investment funds are conceived, in principle, as a suitable product for the particular investor, whereas the free-funds are preferably destined to qualified investors.
Free Investment Funds
Free investment funds are also known as hedge funds.
They are not subject to the investment restrictions established for most of the funds: they may invest in any type of asset, follow the investment strategy they deem most appropriate and borrow more than the other funds (up to several times heritage). They are generally non-liquid products and, in some cases, they even set a minimum period of permanence for their shareholders (from the date they subscribed their shares) during which they are not allowed to repay.
Therefore, investment in hedge funds may entail significant levels of risk. Due to their special characteristics, in principle they are directed to qualified investors (banks, insurers, pension funds …). The minimum investment is 50,000 Euros.
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Funds of Free Investment Funds
These are collective investment schemes designed to enable private investors to access alternative investment products:
- They are funds of funds: they do not invest directly in securities, but in other investment funds.
- The funds in which they invest should be, for the most part,hedge funds.
- Level of risk: the freedom of FFIL to decide their strategies allows access to new investment opportunities, but also usually involves higher levels of risk.The value of the investment can vary significantly over time, and performance need not be tied to the evolution of stock markets.
- In general, FFILs are less liquid than traditional funds. This has practical implications both as regards the calculation and publication of the net asset value and the redemption regime:
- Net asset value: The share price may be published on a period of three or even six months (although in practice it is possible that many funds opt for a monthly frequency).
- Refunds: As with the net asset value, FFILs may allow repayments only every three to six months, with the following particulars (if so provided by the prospectus):
- Suspension of the right of reimbursement: some funds may establish minimum periods of permanence to their unit holders (from the date they have subscribed their shares) during which they will not be allowed to repay.
- Maximum reimbursement amount: a maximum amount of reimbursement can be set on a certain date, with apportionment in the event that requests for reimbursement exceed this limit.
- Warnings: periods of notice may not exceed 15 calendar days the calculation period of the net asset value.
- Payment of reimbursements: the payment of reimbursements to the participant can be delayed up to double the period of calculation of the net asset value, but not exceeding the maximum period of six months from the date the request was made (in the traditional funds the Term is 3 business days from the date of the applicable net asset value).
- Commissions: FFILs are free to set their commissions, as the maximum limits established for traditional funds are not applicable to them.
- Consent Document: Before contracting an FFIL, the investor must sign a document stating that he has been informed of all risks inherent in the product.The entity is obliged to provide you with a copy of the consent document, which must be kept together with the prospectus and the subscription application as long as you maintain the status of FFIL participant.
- By investing in funds, rather than directly in securities or other financial instruments, hedge funds are in principle more suitable for small investors than hedge funds, since the diversification they offer allows some control of the level of risk.
- The funds of free investment funds are one more of the investment alternatives available in the market.In general it is not advisable to invest all of the savings in this product.
- These are products with limited liquidity, so it is advisable to allocate to this investment that part of the capital that can be kept immobilized for prolonged periods.
- As with any other investment fund, it is essential to consult the fund prospectus before investing.It is the only document that contains all the relevant characteristics: fund risk profile, portfolio selection criteria (funds invested), investment strategies and their special risks, repayment regime, minimum investment, etc.
- Before signing the consent document, investors must be completely sure of their understanding, particularly the characteristics and special risks that are assumed with the investment.
What is the Investment that Best Suits You?
It is impossible to give a universal answer to this question. Generally, the most sensible thing is to request the advice of professionals of recognized solvency and, above all, to have common sense. Fortunately, the existence of a wide variety of financial products in our markets, with differentiated profitability and risk characteristics, makes it easy for us to find suitable investment alternatives.
Before deciding to commit their savings, investors must realize their own personal goals:
- Determine the amount of money that is destined to the investment
- How long do you want to have capital immobilized?
- What performance is expected to be obtained and what risk are you willing to take in return?
In this sense, it is necessary to analyze factors such as age, socio-economic and family status, degree of risk aversion, capacity to generate savings, etc in order to decide the most appropriate destination for their savings. It is important to remember that the relationship between profitability and risk improves the longer the time horizon.
On the other hand, you must consider the amount and degree of diversification of your assets. Diversifying investments, i.e. distributing them among different financial products, is often an effective way of limiting risk with reasonable returns.
Finally, be aware that not everyone has the same personal predisposition to accept and manage risks. It is not only a psychological risk-sensitivity problem, but also a practical management problem: the greater the risk you are willing to accept, the more time and attention you should take to track your investments.
Given your personal needs, you only have to choose from a wide range of products, after being informed of the characteristics of each one. To do this, we ask some questions that should always be asked:
- Does this investment match my objectives?Is it right for me?
- How will I get the returns (through the payment of dividends, interests …)?What is the taxation of the product?
- How much will I have to pay for subscription and redemption fees, administration and custody fees, or commissions for purchase and sale?
- Is it a liquid product?Is it traded in an organized market? Will it be easy to sell if I need the money?
- What are the specific risks of this asset?How much can my losses rise in the worst case scenario?
- Who oversees the product?
Types of Investment Funds
If you have decided to invest in an investment fund, in the market you will find a wide range of possibilities, depending on the type of fund and its investment vocation. We can talk about the following types of mutual funds:
- Ordinary, which invest mainly in fixed income, equity and / or derivatives.
- Of funds, which invest mainly in other investment funds.
- Subordinates, which invest in a single investment fund.
- Index, whose investment policy tries to replicate a certain index?
- Quoted (ETF), whose peculiarity is that they are traded on stock exchanges, such as shares.
You will find 15 categories of investment funds according to their investment vocation:
- Monetary fund’s: characterized by the absence of exposure to equity, currency risk and subordinated debt. The average duration of your portfolio is less than six months and can only invest in assets with a short-term credit rating of not less than A2 (or equivalent).
- Fixed income funds: they are characterized by the absence of exposure to variable income.
- Equity funds: it has a minimum exposure of 75% to equities.
- Mixed funds: in this group you can find fixed income funds, with equity exposure below 30%, or mixed-income funds, with equity exposure below 75% and above 30%. Both fixed income funds and equity funds and mixed funds can be either euro or international.
- Total or partially guaranteed funds: depending on whether or not they insure the entire initial investment. In turn, within fully guaranteed funds you can find:
- Funds that ensure a fixed return, called guaranteed fixed yield funds.
- Funds that offer the possibility of obtaining performance linked to the evolution of an equity instrument, currency or any other asset, called guaranteed variable yield funds.
- Passive management funds: they pursue a specific objective of unsecured profitability or replicate an index.
- Absolute return funds: they pursue an unsecured objective of profitability and risk on a periodic basis. Free investment funds (also known as Hedge Funds) usually belong to this category.
- Global funds are funds whose policy does not fit into any of the previous vocations.