What is a mutual fund?
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors.
What is an Equity Fund?
Equity fund refers to a fund in which total investment in stocks accounts for no less than 70 percent of the total asset value of the fund.
What is a Bond Fund?
A bond fund is a fund invested primarily in bonds (also known as a fixed-income security) and other debt instruments. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, in addition to other debt securities like mortgage-backed securities (MBS).
What is a Balanced Fund?
A balanced fund is a mutual fund that contains a stock component, a bond component and sometimes a money market component in a single portfolio. Generally, these funds stick to a relatively fixed mix of stocks and bonds. Their holdings are balanced between equity and debt with their objective between growth and income. Hence, their name "balanced."
What is a Fund of Funds?
A fund of funds (FOF)—also known as a multi-manager investment—is a pooled investment fund that invests in other types of funds. In other words, its portfolio contains different underlying portfolios of other funds. These holdings replace any investing directly in bonds, stocks, and other types of securities.
FOFs usually invest in other mutual funds or hedge funds and shall invest in no less than five sub-funds.
What is an Umbrella Fund?
An umbrella fund is a collective investment scheme that exists as a single legal entity but has several distinct sub-funds which, in effect, are traded as individual investment funds.
How are the profits on investment funds calculated?
An investor's profit on a fund investment comes from the difference between the investor's subscription price and redemption price.
Rate of return= (net redemption price－net subscription price)/net subscription price
Advantages of investment funds
1.Small investment: Because a mutual fund is an investment security type that collects small amount of funds from investing public and that depends on professional managers determining the timing of stock investments and employing systematic research as well as precise investment management strategies to pursue stable profits, the investment returns tend to be better than those of individual investors.
2.Simple procedures, low fees: Investing fund is convenient and money-saving and subscription fee is low. Compared with individual investments, funds can save much expense and processing time.
3.Easy realization, high liquidity: To meet their individual needs, investors can redeem their shares at any time.
4.Legal tax exemption: Because capital gain from investment fund is tax-free, fund is an ideal means of tax exemption for investors.
5.A good means of saving and preparing for retirement, real estate purchases, and children's education: The various investment targets within a fund's portfolio are very similar to such money investment tools as bank CDs and loan clubs but have higher returns than bank CDs and lower risk than loan clubs. Funds are stable long-term investments on the principle of making large investments accumulated small amount so they are suitable means of preparing for children's education expenses. While the value of mutual funds will vary with fluctuations in the investment market and securities, the prices tend to rise gradually due to funds' characteristics: a large amount of assets, broad scope of investment targets, and reinvestment of profits; in addition, the benefit of interest compounding will emerge when funds are held for long periods of time. As a consequence, investing funds are suitable elements of long-term investment plans, such as retirement investment fund-raising plans.
Do funds have any risk?
All investments have a certain degree of risk; in general, investment funds have the following risks:
1.Market risk: the risk is that the value of an investment will decrease due to changes in market factors (e.g. political, economic, society.) These factors will have an impact on the overall performance on the financial markets and can only be reduced by diversification into assets that are not correlated with the market – such as certain alternative asset classes.
2.Purchasing power risk: the risk, also called inflationary risk, is the uncertainty over the future real value (after inflation) of an investment.
3.Interest rate risk: when the interest rate changes, it will reduce the value of the fund's investment targets, which will reduce the net value of the fund.
4.Credit risk: If the fund invests in high-risk investment targets, it sometimes affects the value of the fund because the investment target credit goes bankrupt.
What are the expenses of investment funds?
1.Management fees: Fund companies charge service fees for the investment of funds on behalf of investors and these fees are usually equivalent to 0.5%-1.5% of a fund's net assets during the year. Fees are calculated on a daily basis and are deducted from the fund's net assets directly on a monthly basis so investors do not need to pay the fees separately.
2.Custodial fees: To ensure the safety of investors' funds, assets operations and custodies of mutual funds are separated in compliance with regulations; therefore, money from investors is handed over to a bank or other financial institution for safekeeping. Custodial fees are paid to the custodial institution and these fees are usually equivalent to 0.15%-0.2% of a fund's net assets. Custodial fees are deducted directly from a fund's net assets so investors do not need to pay the fees separately.
3.Subscription fees: Besides the subscription amount, investors must also pay subscription fees when purchasing shares of mutual funds and these fees for domestic funds are usually equivalent to 1.5%-2.0% of investment amount. Subscription fee = subscription amount * fee rate.
4.Redemption fees: Investors who perform redemption through a bank must usually pay a service charge of NT$50-100.