"Don't put all your eggs in one basket” is an old English proverb that seems very apt when talking about financial investments: investing in one or a few securities in fact exposes the saver to a strong concentration of risks, as the negative performance of even just one of those securities would end up harm the performance of the entire investment. For any saver it is therefore essential to diversify the composition of the investment portfolio in order to obtain returns that are not only satisfactory but also as stable as possible, i.e. less risky.
Mutual investment funds were created precisely to satisfy this need, that is, to offer savers financial products that are already diversified and professionally managed, avoiding the difficulty that each of these would have in building, diversifying and managing their individual portfolio. The assets raised by an investment fund are distinct from those of the Asset Management Company (RMS) which takes care of its management and is typically divided into shares, subscribed in variable numbers depending on the financial availability of each investor.
Open and closed investment funds
There is talk of open funds when subscribers have the right to enter and/or exit the fund at any time by subscribing or requesting reimbursement of their shares at a price (Net Asset Value, NAV) which is calculated daily based on the value of the securities in which the fund has invested (typically listed shares and bonds). In an open mutual fund, the assets therefore vary every day, both because the market value of the securities in which it is invested fluctuates, and because new subscribers can enter or exit the fund on a daily basis. It is also worth underlining that the value of the investment in an open fund is never guaranteed, but varies positively or negatively, depending on the market trend (so for example investing in a bond fund or in a BTP held until they are not the same when they expire!). The value of the individual saver's investment, distinct from the fund's assets, is obtained from the value of each share; it is the latter that varies over time depending on the performance of the fund.
We are facing closed-end funds instead, when the reimbursement of the units can only be requested upon expiry of the fund, thus guaranteeing greater stability of the fund's assets which in fact are typically invested in less liquid and unlisted asset classes (real estate, private equity, private debt) in search of higher returns high.
The different nature of open and closed funds makes the former more consistent with the needs of the mass market, also in consideration of the reduced minimum investment required (1.000 euros are often sufficient to subscribe to shares of an open fund). Most mutual fund distributors also offer the possibility of diluting the entry into an open-ended mutual fund through the so-called Accumulation Plans (PAC). The latter allow a sort of installment payment of the investment which facilitates the accumulation of savings and spreads entry into the financial markets over time, also reducing the possible impact of unfavorable market timing (for example, when purchasing at the peak of a bullish stock market cycle).
In the case of closed-end funds, however, the minimum subscription is usually higher than 500.000 euros, which, together with the fixed and medium-long term of the investment (5-7 years), makes these products useful for savers with high individual financial resources or for institutional investors.
Open-end mutual funds
Focusing now on the case of open funds (the most widespread, given that they collect over 90% of the assets invested in funds for the Italian market - see fig.1), the five main advantages can be identified as
- Diversification of investments (even smaller funds actually invest in dozens of securities)
- Intermediation of denominations (i.e. possibility for investors to subscribe to shares of even minimal amounts)
- Liquidity intermediation (i.e. possibility for investors to enter and/or exit funds daily)
- Professional management (carried out by the SGR which composes and manages the fund portfolio based on the characteristics illustrated in the Key Investor Document o KID)
- Cost containment (the costs of the management, transaction and administration of the fund fall on its overall assets, reducing the impact for the individual investor thanks to economies of scale).
To describe the contents of the funds, some categories are typically used (monetary, bond, equity, balanced and flexible - see fig 2) which recall the prevailing type of investment. If the first three categories directly evoke the reference asset classes (money market securities, bonds and government securities, shares) additional clarification is needed for balanced and flexible funds. The former combine equity and bond investments in a substantially similar and stable proportion; the latter, however, leave greater freedom to the manager to compose the portfolio with shares and bonds in proportions that can be modified depending on the performance of the respective markets.
Actively and passively managed funds
For each mutual fund the manager must identify a benchmarking that is, a benchmark, which is typically an index or a combination of market indices that tracks the performance of the asset classes invested. The objective of the benchmark is twofold: on the one hand to facilitate the customer's understanding of the type of product; on the other hand, favor the evaluation of the fund's results. In extreme summary we could say that a fund "passively managed” (i.e. which replicates the composition of the benchmark) should produce results in line with or slightly lower than the same. Conversely, from a fund "under active management” (whose composition is defined by the manager on the basis of his own research activity) a performance that is on average brighter than that of the benchmark itself is expected.
The costs of mutual funds
A final important attention must be paid to Costs of the funds and their consistency with the characteristics of the product. In fact, a recent analysis by ESMA* highlights that the costs of UCITS funds (i.e. those complying with European regulations) have progressively decreased over time, but important differences remain in the various countries (and the funds marketed in Italy are among the most expensive of all). To truly add value to savers, the Italian mutual fund industry will therefore have to be able to further contain costs (especially for passively managed funds) and provide valid and original investment ideas (for active management). Conversely, the competition from new products (such as ETFs, which will be covered in the next entry in the Financial Guide) and from large international managers will acquire an increasingly predominant weight in our country too.
* ESMA Market Report, Costs and Performance of EU Retail Investment Products 2023, 18 December 2023; ESMA50-524821-3052
