Investment funds

• What they are
• Interested parties
• Strengths and drawbacks
• Expenses
• Underlying rules
• Pitfalls

What they are

These funds are investment instruments. When they join a fund, investors entrust their savings to a skilled and experienced professional who manages them ('asset management'). Savers who join a fund subscribe units representing shares in the fund's assets, which comprise all the savings entrusted to the professional manager.

The value of the units varies over time depending on how the investments made by the fund perform and the consequent 'net value' of the assets under management (net asset value or 'NAV' for short). In order to assure its correct and transparent management vis-à-vis the participants, the fund is regulated.

Wealth management by investment funds is entrusted to asset management companies (SGRs). The same investment activity can be carried out by open-end investment companies (SICAVs) or closed-end investment companies (SICAFs).

There are two ways to subscribe units of the fund:

• payment of a lump sum to subscribe a capital investment plan (CIP);
• periodic payments over a fixed time horizon until a certain amount of units have been subscribed, through membership of a capital accumulation plan (CAP).

Depending on the instruments in which they invest, funds can be classified as:

• equity funds, mainly consisting in shares;
• bond funds, mainly consisting in bonds;
• balanced funds, operating in both the equity and bond segments, with percentage weightings (and therefore different degrees of riskiness) from fund to fund;
• money market funds, operating in the money market.

Based on the means of subscription and redemption, it is possible to distinguish between:

• open-end funds, whereby units can be subscribed at any time or the right to redemption can be exercised according to the rules of the fund;
• closed-end funds, whereby investors have the right to subscribe new units issued or to redeem the units only at certain maturities.

Another distinction can be made between:

• harmonized funds, for which EU law places a series of constraints on investment with the objective of limiting risks and safeguarding subscribers (for example, in terms of concentration on a single issuer, investment in derivatives or in securities not listed on regulated markets);

non-harmonized funds, subject to less stringent rules and therefore greater freedom in how the monies are invested but also potentially greater risk.

Interested parties

Savers with little investment experience who want to invest by relying on experts. The various funds, moreover, enable investors to make decisions based on their own investment objectives and risk profile.

Strengths and drawbacks

Investing in a fund means:

• entrusting your savings to a professional manager with specific experience and skills;
• diversifying, thanks to the fact that the assets of the fund, whose units are subscribed by investors, enables investment in very different kinds of security (by geographical area, commodity sector and currency).

Other advantages of this kind of investment include:

• the quality of the information available to investors;
• the greater liquidity of the investment compared with alternative investments (such as unlisted bonds);
• the various controls of the fund's assets by the Bank of Italy and Consob;
• the fund's resources, which are legally separate from those of the manager, and therefore 'protected' from eventual creditors.

But investors beware. There is no guarantee on the investment's return or full repayment of the principal. It all depends on the market and on how the fund performs, and the costs can have a significant impact on net returns.

Expenses

Against the returns on the allocation of the fund's assets, the investor must bear costs set out in the documents delivered at the time of investment (see 'Underlying rules' below). These generally consist in:

• entry fees payable by subscribers;
• management fees linked to the fund's administration;
• performance fees, calculated based on the results achieved;
• exit fees, linked to the sale of the units.

Any earnings on the investment (coupons, dividends or capital gains) are subject to tax.

Underlying rules

As a rule, investors have the right to credit (for the units they have invested in) relative to the redemption of the fund's value at a given date. They do not have the power to instruct managers on how to invest, as this is the exclusive right of the latter.

At the time of subscription, investors are entitled to receive copies of the:

• KID (Key Information Document), summarizing the key characteristics of the fund (purposes and investment policy; risk-return profile; costs; past performance).
• prospectus (whose contents are approved by Consob) containing all the information needed for savers to formulate an informed opinion of the investment product;
• regulation, defining the characteristics of the fund and regulating how it works, indicating the manager and custodian and defining their tasks, and regulating relations between them and the fund participants.

Following the subscription, the information on the change in the units' value must be made available to the investor, as well as any changes in the fund's characteristics, the updated data on the returns and benchmark and the accounting documents.

Pitfalls

Extrapolation error: analysing the past returns of a fund to assess the quality of the management is certainly useful. However, positive returns in the past are no guarantee of the same in the future.