In times of extremely low interest rates, more and more conservative investors are eyeing the stock market. Compared to individual stocks, equity funds have the advantage that they spread the risks across numerous stocks and any declines in the price of a single stock are compensated for by the other stocks in the fund. In the case of equity funds, a distinction must be made between numerous investment focuses. Only the very early funds, such as the Pioneer Funds, founded in 1928, are not subject to any regulations.
- Investors who want to build up or expand their assets with equity funds should think about how they want to invest in advance.
- The rough classification of equity funds is based on the distinction between growth funds and value funds.
- In principle, the issue surcharge applies when purchasing an equity fund. This is between four and six percent, depending on the fund and capital management company.
The investment focus for equity funds
Investors who want to build up or expand their assets with equity funds should think about how they want to invest in advance. Two objectives play a role in an investment. Either short- and medium-term price gains are in the foreground or a long-term increase in value with a high payout at the same time. Depending on the investment focus, the funds are divided into the risk classes customary in Germany. Standard values, for example international blue chips, are assigned to risk class three. Funds that invest in emerging markets or price-sensitive sectors fall into risk class four. When opening a custody account, the investor informs the bank of what experience he has in the securities business and thus receives the assignment. According to abbreviationfinder, PEF stands for Private Equity Fund.
Growth or Value?
The rough classification of equity funds is based on the distinction between growth funds and value funds. The term “growth” has a different meaning today than it did at the beginning of the fund’s history. A growth fund offers above-average price potential with a relatively high price risk at the same time. Emerging market funds are included in this group. Value funds focus on conservative stocks with stable dividends and only relatively low short-term price potential. Dividend funds belong to this group.
Global investing funds
This group of equity funds invests in all industries worldwide. The investment approach is usually based on a low price estimate with high potential.
Dividend funds invest in stocks that consistently pay out above-average dividends. Possible price gains are not in the foreground here.
Country or regional funds invest across sectors, but only within one or more specific regions. A popular example of this are the so-called BRIC funds. These have their investment focus in Brazil, Russia, India and China and rely on the economic strength of these emerging countries.
Industry and theme funds
As the term makes clear, certain industries or topics, such as raw materials, are at the heart of the investment here. This category includes the most speculative equity funds, biotech and technology stocks.
Fund of funds
Fund of funds bundle several funds under one umbrella. Funds of funds are often used in asset management on a fund basis and are set up in different risk ranges. These differ in the amount of the share quota and again in the selection of shares.
Index funds are not created on the basis of a market analysis, but rather replicate a stock index such as the DAX 30. The fund management only intervenes if there is a change within the index. Against this background, index funds are also referred to as passively managed funds, which in turn is reflected in a lower management fee. In the past, index funds have performed no worse than actively managed funds.
Distribution or retention?
In the case of equity funds, a distinction must be made between two variants with regard to dividend payments. Distributing funds credit the accumulated dividends and price gains to their investors on the clearing account once a year. The credit is made minus the possible withholding tax. Accumulating funds immediately reinvest the profits in new shares. The reinvestment is also carried out taking into account the final withholding tax, as the retention is viewed under tax law as a profit equivalent to distribution.
The cost of an equity fund
In principle, the issue surcharge applies when purchasing an equity fund. This is between four and six percent, depending on the fund and capital management company. However, there are some banks that issue fund shares with high discounts or without this premium, the agio. In addition to the premium, the fund administration and management fees are also charged. As these vary from company to company, a comparison can only be made if the return on the fund is given using the BVI method. This method, used by the Association of German Investment Companies, makes the actual performance transparent.
The fund of funds problem
Fund of funds are of course subject to a fee. However, it becomes critical when the funds in which the fund of funds invests also charge fees again. In this case, investors simply pay twice. When choosing a fund of funds, care must be taken to ensure that costs do not accumulate.
How safe is the money?
Investing in an equity fund is exposed to stock market fluctuations. However, the past has shown time and again that a price decline was followed by a renewed price increase. A total loss would only be possible if all stock corporations in the fund were to file for bankruptcy at the same time. Since the customer money of an equity fund is a so-called special fund, which is not managed jointly with the assets of the fund company, an insolvency of the fund company would have no effect on the fund itself. This could be continued by another company without change.