FAQ

Investment funds, financial advisors and fund management companies are all carefully regulated, and strict rules are in place to ensure that professionalism and “best practice” prevail. If a fund is not performing as you expected, it may be that market conditions have taken a downturn. Market fluctuations are normal, but it’s important to understand that the fund manager always has to act within the rules set out in the prospectus and the regulations imposed by the supervisory authorities.

Therefore it is worth checking whether the fund is investing as promised in its prospectus. This can be done by studying the annual report, which will contain a statement by the fund’s independent auditor. If you believe that investments in the fund do not correspond to the prospectus or the marketing material you received, or if you object for any other reason to the way the management company or the fund manager have discharged their duties, you should first contact your financial advisor, although you can also contact the company directly. If you are not happy with their response, you may contact your home country’s financial regulator, the financial regulator of the country in which the investment fund is based, or a consumer protection office. They will be able to help and advice on what you should do next.

Financial advisors should provide guidance and investment recommendations based on your investment profile and attitude to risk. If you feel advice you acted upon has not been suitable for your investment needs, you may contact the financial institution by which the advisor is employed, a professional organisation for financial advisors in your home country, or your local financial regulator.

The first source of information about funds for investors should be the Key Investor Information Document, which must be produced by the fund manager for each UCITS fund as from July 1, 2011 (they have up to 12 months to produce a KIID for funds already in existence at that date). The document contains information about a fund’s objectives and investment policy, risk/reward profile, charges and past performance, and details where other information can be found.

Additional information about Luxembourg-based funds is generally available from the management companies of the funds in question and their distribution channels, such as banks, insurance companies and financial advisors. However, general and detailed information on all funds established in Luxembourg are available from the Finesti web site (www.finesti.com) which also allows you to examine how funds compare in different ways.

The fund’s prospectus will tell you how often fund units or shares can be bought (subscribed) and sold (redeemed). Most UCITS offer daily subscription and redemption (although there are funds that offer these weekly or twice a month). Sometimes funds are closed for new subscription and therefore investors cannot buy units.

The way fund units and shares can be purchased and sold varies from country to country and may differ according to the distribution channels selected by the management company. The easiest way to find this out is to contact your financial advisor or the management company of the fund directly for the necessary information. You may also check the fund’s prospectus for details about distribution channels, paying agents and/or other sources of information.

A broadly diversified portfolio of assets is one not overwhelmingly invested in a single security or in one particular country, region or sector, or in a particular type of asset. For example, investing only in investment funds focusing on equities from one sector of industry would expose your capital to a high degree of risk, even if the investment fund were highly diversified within the sector in question. A fall in that sector could result in a significant loss to all your investments at the same time.

To create a diversified portfolio, you first need to understand what financial goals you are trying to achieve and the degree of risk you will accept in order to achieve them. If your primary concern is with maximising capital growth, you would need to hold a larger proportion of your money in equity funds. But if preservation of capital is your main priority, you will prefer a larger proportion of fixed-income and other lower risk funds. However, the main point about a balanced portfolio is that it should strike the right balance between capital growth and preservation, in other words between risk and reward, for your individual circumstances. Financial advisors can help you to put together a portfolio of assets that will meet your needs.

The financial markets in general and funds in particular should not be seen as an opportunity for ‘get rich quick’ investment. Investments that offer the prospect of rapid gains also contain the potential for fast losses. Even if an investor decides to combine solid, conservative investments that offer stable long-term growth with more aggressive investments that have the potential for higher growth, this is a strategy that should not be undertaken without expert advice. Investors should beware offers that hold out the promise of quick and easy gains. If it sounds too good to be true, it probably is!

In the financial world, equities and bonds perform different functions. These are complementary rather than mutually exclusive. Many investors feel most comfortable with a mix of both types of asset, either through a combination of bond or equity funds or through balanced funds that invest in both. Equities offer the potential to maximise capital growth, while bonds provide a fixed return over a set period of time.

The prices of equities fluctuate according to many different factors, including the general economic environment of a specific sector, an entire country or a region, as well as the strength and stability of the company offering the shares. Bond prices are affected by the creditworthiness of the issuer and the interest rate environment. These different characteristics mean that the proportion of bond and equity funds within an investor’s portfolio may change over time, depending on the economic climate and on the investor’s own needs and risk profile.

There are of course investment funds on the market with certain guarantees or a type of capital protection attached, which, as a rule, secures all or part of the amount originally invested. There are also funds that “lock in” gains that have already been made. These funds offer cautious investors peace of mind. The cost of providing the guarantee is likely, however, to mean that returns under good market conditions will be lower than they would have been without it. These products require capital to be locked up for a fixed period in order for the guarantee to take effect. For certain guaranteed products an early decline in the value of the investments can mean the fund will never return much more than the invested capital, no matter how strongly the market recovers subsequently. And one lesson of the recent financial crisis is that a guarantee is only as strong as the company that provides it.

When you decide to invest, the timing of the investment should depend primarily on your own personal circumstances and your investment objective. You should take into account such factors as your current income and expenditure, your age, family circumstances and lifestyle expectations.

Ups and downs in the price of shares, bonds and other assets are normal, but they tend to average out over time, so the longer the period over which you invest, the less your money will be affected by short-term price fluctuations. This is helped by regular investment that ensures you put money in the market in all conditions, when prices are low as well as when they are high.

Taking on risks is an important part of investment. Successful investment is not simply about constructing a portfolio to deliver the maximum returns but also meeting performance objectives while taking the least possible risk. Investment companies put in place extensive control mechanisms to monitor and manage risk. Fund managers adhere to strict guidelines on the maximum proportion of the assets that can be invested in individual securities or particular countries or sectors, which are set out in the prospectus. Fund management companies have internal analysis processes designed to calculate and monitor risk values for securities and the portfolio. If the risks exceed certain limits, the portfolio manager can intervene at an early stage.

Investment decisions for UCITS funds are taken within a framework of checks and balances designed to ensure that the fund is being managed as set out in the fund prospectus. Independent service providers such as the fund’s custodian are part of a regulatory structure designed to protect the interests of investors and ensure that the fund assets are being invested in accordance with the prospectus. If you are concerned that the fund is not following the stated investment policy, you should first contact your financial advisor. You may also contact the fund management company and the financial regulator of the country where the fund is registered.

The UCITS rules give investors a legal right to redeem their holdings at least twice a month. Most funds, however, buy and sell on a daily basis. The proceeds are paid to the investor on the settlement day, which is usually up to five days later. The redemption price reflects the assets held by the fund. Details of redemption and settlement dates will be found in the fund’s prospectus. Exchange-traded funds can be sold on stock exchanges throughout the trading day, although the settlement period may be different. It’s worth remembering that in general investments tend to produce the best performance if they are held for the medium to long term. In an emergency, though, UCITS funds can be redeemed at fairly short notice.

Investment funds provide a cost-effective and efficient way to access a wide variety of financial assets. With a portfolio of assets selected to meet specific investment objectives, investment funds are available to suit every type of investor, from the most cautious to the most adventurous. Investment decisions for a fund are taken by trained professionals with years of specialist experience. Direct investment in shares and bonds, on the other hand, requires in-depth knowledge both of companies and of the economic environment. Even with help from a financial advisor, it is a time-consuming and expensive process that should only be attempted by sophisticated and experienced investors with time to devote to making financial decisions and acting on them.

Obviously the younger you start to invest for your retirement the better, but anyone – even a person just five years away from retiring – can still take steps to increase the amount of money available upon retirement. However, older investors should adopt a more cautious investment strategy to minimise the risk of a significant loss of capital in the run-up to their retirement. Younger investors, on the other hand, can be more aggressive, as they have many years of earning and investing ahead in which to make up any short-term losses.

Although bank accounts are generally considered very safe investments, interest rates in most countries are at their lowest level in many decades and bank savings provide very low returns. Investment funds offer investors the opportunity to earn higher returns, either to increase income or to save for future needs. The vast choice of funds available allows you to select investments that suit your willingness to take risks – or not.

There is an enormous array of financial options available and selecting the one that will best meet your needs is vital part to your long-term investment success. A financial advisor will help identify your risk profile, your financial goals and your overall financial position. With this knowledge the advisor can help you select a combination of investments tailored to match your needs now and in the future. Financial advisors’ experience and skills bring clarity and focus to a subject that can often seem complex and daunting.