Investment funds: definition, operation, advantages
When you want to invest a financial nest egg, you generally want it to grow enough to get a return on investment. To optimize your chances of earning interest, you can turn to investment funds. What are they, how do they work and what are the benefits? Answers.
What is an investment fund?
An investment fund, also called a mutual fund, is a public or private company that raises capital from investors to make collective investments in financial securities of promising business projects. These targeted investments have the sole objective of generating profit in the short, medium or long term, but like any investment, they still present a risk, even a lower one.
Investment funds specialize in a particular sector, each presenting its own specific challenge:
- Venture capital: These are investments made to finance start-up companies seeking funding. This is the perfect opportunity for young start-ups in particular to develop a project that is promising because it is innovative, because it is in tune with the times, because it is eco-responsible, etc. ;
- Development capital: These are investments made in companies that have a viable project, such as exporting abroad or diversifying a range of trendy products;
- LBO capital, for Leverage Buy-Out, translates to “leveraged buyout”: These are investments made for the buyout of a company using high debt. The investment fund then becomes the majority shareholder of the company.
And from a business perspective?
To develop your business or launch a project, funds are always needed. It is then possible to contract loans, to call on grants, to also bring personal resources, but this may not be enough when you strongly believe in the success of a project that requires a significant fundraising. .
The use of an investment fund then becomes the right plan! The company will have to manage to convince him of its seriousness, of its potential, of the quality and feasibility of its project, of the good market conditions and of the competition so that the investors proceed to an injection of capital which offers the company the expected fundraising, also benefiting from the common network of investors. In return of course, investment funds receive part of the capital.
The different investment funds
Investors can be natural persons, professional investors or business partners who, often inexperienced and yet wishing to build a diversified portfolio, will benefit from the intermediary of experienced managers working for the investment fund, specialized in advice and investment guidance.
Each unit purchased by the invested capital offers a short, medium or long-term return, which will vary according to the number of investors, the exchange rate which corresponds to the price of the currency compared to another currency, and the type of fund. chosen investment:
- The equity fund, specializing in equity investment, which is one of the riskiest but most profitable;
- The bond fund, specializing in the placement of government or corporate bonds, generally a source of significant profit;
- The savings fund which consists of blocking its capital for at least ten years, with a low risk of capital loss, but a low return;
- The real estate fund to invest its money in real estate or land companies, buildings or land, with the primary aim of tax exemption;
- The monetary fund is a short-term investment in government or corporate debt, such as treasury certificates, bank deposits or Treasury bonds issued by the States;
- The mixed or balanced fund which allows several investments of different funds to secure the capital invested, allowing investments in secure funds and others in riskier but more profitable funds.
Investment funds may be UCITS (Undertakings for Collective Investment in Transferable Securities) which are available according to the type of investment:
- The SICAV (variable capital investment company) which is the most common UCITS for diversified investments. By investing your money there, you become a shareholder of the SICAV;
- The FCP (mutual fund) for small savers, who become not shareholders but co-owners of securities. On the same principle, the FCPE intended for employee savings belongs to employees of the company;
- Hedge Funds (translated alternative investment funds) are more flexible because they are less regulated. These are often very large investors;
- ETFs (Exchanges Traded Funded, translated Listed Index Funds), which offer indirect investments in several stocks, often preferred by novice investors;
- SCPI or OPCI (Société Civile de Placement Immobilier or Organisme de Placement Collectif Immobilier) which buy real estate services.
They may also be Private Equity funds for the most experienced investors, with a higher risk of capital loss since they place the funds in unlisted companies, ETIs (Intermediate Size Companies), SMEs (Small and Medium Enterprises) and start-ups.
How does an investment fund work?
Investment funds can be created by financing organisations, by banking establishments or by individuals, on the condition of obtaining approval from the Autorité des Marchés Financiers. They will therefore be taken out with traditional banking establishments or financial organizations such as online brokers. Their perfect knowledge of the financial and stock markets will allow an in-depth and expert study of market tension for a modulated risk, which can never be zero anyway.
The basics being laid, the operation of an investment fund is ultimately rather simple. Investors entrust their savings to specialized operators, which are kept by a custodian bank. They make capital investments in buoyant markets for the sole purpose of generating a profit. Investors are remunerated by interest. If this is not or is no longer the case, since investment funds generally have variable capital, so there is no obligation to maintain the value of the capital invested, it is possible to exchange its securities at any time on a secondary market, which is the equivalent of a second-hand market where financial securities are resold for capital gain or to limit the capital loss.
What are the advantages of the investment fund?
Investing in an investment fund brings certain advantages, including the following, which are not exhaustive:
- Take advantage of the leverage effect: The investment fund is a pooling of capital from several savers. This multi-ownership operation allows the investor to access a range of investment products that would not be available to him if he decided to invest alone. Unity is strength it seems, this is the case of the investment fund.
- Diversify his investment portfolio: The managers will direct the investments for an optimal return, which allows the investor to diversify his investments and to modulate them according to the evolutions of the markets.
- Support companies with high potential: Add to that the fact of being able to support projects to which the investor is sensitive.
- Tax exemption of your capital: Real estate tax loopholes in particular are perfect products and investments for tax exemption. We can cite for example the Pinel and Malraux laws on the purchase of real estate, or investments in SCPIs or OPCIs which provide the tax advantage of only owning bare ownership.
- Take advantage of the expertise of portfolio managers: The funds invested will be placed by financial and stock market experts. By investing alone, it would be more difficult to optimize your investments.
These advantages, concentrated around the benefit provided by the expertise of the company at the initiative of the investment fund, are offset by the management fees it will impose, which may sometimes reach 2.5% of the capital invested depending on the type of investment.