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Investment Funds
Home >> Operadora_eng > Funds Fast Course > Friday, April 25, 2014  

Funds Fast Course






 

As your grandmother used to say.... "Don’t put all your eggs in one basket". Diversification is the most important ingredient of any investment portfolio. Diversification means investing your wealth in different instruments so as to significantly reduce the risk of your portfolio. In addition, it is the best way to maximize your returns and minimize your risks in the long term. Diversification implies maintaining an adequate mix of different types of financial instruments (different markets, different terms, different currencies etc).

A good way to diversify is by means of investment funds (also known as mutual funds). Investment or mutual funds serve the purpose of pooling the savings of small and medium sized investors for investment in Capital Markets. In other words, an investment fund is an instrument through which a group of investors with similar objectives pool their resources to be managed by a team of professionals for investment in different financial markets.

What are the advantages of an investment in Investment/Mutual Funds?

Returns: The joining of the capital of different investors provides access to instruments with greater benefits in terms of yield and terms.

Diversification. By investing in an investment fund, you are investing in a basket of instruments. In other words, all the money of a fund is invested in different instruments with different maturities.

Liquidity. Investors are able to choose a fund based on the liquidity that the fund offers. There are funds that offer daily access to client money, while there are other funds where liquidity is provided weekly or monthly.

Professional Administration. An investment in funds offers the guaranteed access to a team of professionals who are on the constant look out for opportunities within the financial market in order to maximize returns.

From top... to bottom!

What is an Investment Fund?

Investment Funds were born from the need to pool the savings of small and medium sized investors for investment in capital markets. In other words, an investment fund is a vehicle through which investors with common objectives pool their resources to be managed by a team of professionals for investment in different financial markets.

What are the advantages of investing in Funds?

1.-Returns. The joining of capital from different investors gives them access to instruments with better returns in terms of yields and maturities.

2.-Diversification. Investing in a fund means an investment in a basket of instruments, that is to say, all the resources of a fund are invested in different instruments and different maturities.

3.-Liquidity. Investors are able to choose a fund based on the liquidity that the fund offers. There are funds that offer daily access to client money, while there are other funds where liquidity is provided weekly or monthly.

4.-Professional Administration. An investment in funds offers the guaranteed access to a team of professionals who are on the constant look out for opportunities within the financial market in order to maximize returns.

 


More advantages for the investor...

An investment via a fund is beneficial to investors with limited resources or for those investors that do not have the time necessary to manage their own money. By investing in a fund, these investors automatically obtain exposure to the capital markets.

What advantages do these fund hold for the economy?

The accumulation of capital in investment funds provides numerous advantages to the economy of the country, because they allow for the flow of funds to private and public entities to assist in the operation of these entities in the execution of development projects that require financing over the long term. In so doing, it guarantees the commitment of capital to companies and institutions, which issue instruments that are bought by the funds and form the basis of the portfolio (or basket of instruments) that is managed by the fund.

What advantages do these funds provide to public or private entities, and/or companies?

The existence of these funds means that these entities can be financed by means of the issuing and placement of instruments that are bought by the funds. By means of the investment funds, small and medium sized savers are able to participate in the return of these instruments. Another advantage for the companies, is that in moments when they have budgetary surpluses, they have investment alternatives that allows them earn additional return for their treasuries. Here we refer to investment funds that are geared exclusively to companies whose treasury departments invest surplus cash.

What are the different types of investment funds?

        In accordance with the law of Investment Funds, there exist three types of investment funds:

          a) Investment Funds that invest in Debt Instruments (also known as Fixed Funds)

These investment funds are only able to invest in debt instruments and whose profits and losses are assigned daily amongst the shareholders. The first of these funds started operating at the end of 1983, and basically they were money market funds, offering investors high levels of liquidity and return, with the funds investing in money market instruments.

Potential investors in this type of fund are the following:

Companies and private clients, both Mexican and Foreigners.

Credit institutions, Trusts, Federal and State Entities, Municipalities, Savings and pension funds, Insurance and Finances Institutions.

Some of the characteristics are:

Are low risk investment vehicles, with attractive returns with good levels of liquidity.

They attract additional resources for the financing of money market and capital market instruments.

The nature of the debt instruments is such that they are traditionally held until maturity.

With an increase in the level of interest rates, the prices of these instruments, and the price of the fund itself could decline and vice versa when there is a decline in interest rates.

Automatic reinvestment of returns.

Continuous valuation of its assets.

What are the defining features of the different Investment Funds that invest in Debt Instruments?

Type Code Characteristics
Money Market MKDDIN

Funds specializing in short term instruments with low levels of credit risk and high levels of liquidity. These funds will invest at least 90% of their assets in government instruments, bank instruments and private notes, with a term no longer than 90 days. 90% of the assets of the fund should contain instruments with two or more high ratings, and solely for the purpose of increasing the yield on the fund; a maximum of 5% of the fund can be invested in paper with a lower rating.

Specialist BANC - BANK GUBER - GOVERMENTAL PRIVADO - PRIVATE OTREAL - OTHERS (REAL RATE) TASREAL - REAL RATE COBDLL - HEDGING

The funds need to invest at least 60% of their total assets in government instruments, bank and private paper, depending on the specialization of the fund, or in securities specifically defined in the prospectus (for example, securities with a real interest rate or hedging).

Combined BANGUB – BANK GOVERMENTAL BANPRIV BANK-PRIVATE GUBPRIV GOVERMENTAL-PRIVATE BAGUPRI BANK-GOVERMENTAL-PRIVATE

Funds with a mixture of government securities, bank and private paper, which need to invest at least 30% of its total assets in at least two or three of the instruments previously mentioned. In the event that the fund is made up of the three types of instruments, the minimum percentage in each asset is 20%.

SINGRAD Securities that do not have an investment grade.

These fund need to invest at least 60% of their total assets in debt instruments that are rated below investment grade.

AGRESD Agressive Debt Funds

Funds whose strategies are based on exploiting market movements, and that can invest in debt instruments without maximum or minimum limits per type of instrument.

b) Variable Return Funds (also known as Equity Funds)

These were amongst the first to appear in the country. These funds invest their assets in variable return instruments, such as equities in addition to variable return debt instruments. Both private clients and companies are able to invest in these companies.

The investor obtains a return on capital invested, which is the difference between the purchase and sale price of an asset in addition to the flow of dividends (when appropriate). These returns are tax exempt for private clients and are accumulated in the hands of companies.

What are the common characteristics of different variable return funds?

Type Code Characteristics
Indexed ACCIND

Funds whose fundamental objective is to replicate the returns of a specific index (for example IPC, Inmex, etc). 60% of the funds assets are variable return assets linked to the index. These funds need to maintain a certain specified tracking error (this is the standard deviation of returns when compared to the corresponding index) equivalent to 7.5% per year.

Long Term ACCLP

Growth funds that should invest at least 60% of their assets in variable return securities and annual turnover in the portfolio cannot be greater than 80%, that means that the average notional value of all the buy and sell orders in the fund, divided by the average monthly balance of the fund, does not exceed 80% - but observed over a 1 year period.

Small and medium sized companies ACCMED

Specialist funds that need to invest at least 60% of its total assets in the shares of small and medium sized companies, that is to say companies that are not included within the 25 companies with the largest market capitalization in Mexico.

Sectorial ACCSEC

Specialist funds that need to invest at least 60% of its total assets in a certain industry or sector (e.g. construction, telecommunications, commerce etc).

Regional ACCREG

Specialist funds that need to invest at least 60% of its total assets in the shares of companies located in a specific region (for example a company located in Monterrey).

Balancead BALANC

Funds that combine within its portfolio, both debt and variable return instruments, but it is obliged to invest between 30 and 60% of its assets in variable return instruments.

Predetermined weighting in debt instruments PREDEUD

Conservative funds that combine within the same portfolio with debt instruments and variable return instruments. These funds need to invest between 10 and 30% of their total assets in variable return instruments.

Agressive AGRESC

Funds whose strategy is based on the capitalization of short term movements of the market and is able to invest in instruments without maximum or minimum limits per type of instrument.

Is it better to invest in one fund or in various?

Diversification helps to reduce risk, and the greater the level of diversification the lower will be the fluctuation or variation in profitability in the medium and long term.

By means of diversification, it is possible to create numerous combinations of markets and assets with different levels of risk/return.

Different types of assets generally behave in different ways under the same market conditions. By means of diversification, amongst the most important markets: debt, equity, currency…. it is able to reduce risk associated with allocating all the capital in one single instrument.

Invest in variable return?

The profitability of these funds is linked to the developments in the equity markets. This makes it possible to earn elevated returns in short periods of time, but it is also possible to earn negative returns. These funds can be classified as high risk.

These types of funds are suitable for those investors with expectations to obtain elevated returns in the long term and are disposed to taking risks in the short term.

What concepts are most common about funds?

Volatility, correlation, Risk and Time

Volatility is expressed in terms of dispersion or fluctuation of returns around the mean over a given period of time.

Volatility is low if the said fluctuations are low or infrequent (giving results that are close to the average value). By contrary, volatility is elevated if the results present frequent and pronounced changes when compared to the mean value (very dispersed values). Volatility is measured by means of Standard Deviation.

Correlation measures the degree of relation between two assets over a determinable period of time. A perfect correlation is when two assets behave in exactly the same way. Correlation varies between +1 and –1.

Risk is the possibility of reduction, including loss, of the value of an asset.

The horizon of an investment is an estimation of the period of time that needs to pass in order to increase the probability to achieve a desired return.

The notion of investment horizon is intimately linked to volatility. When volatility is elevated, then the longer the investment horizon of the investor should be. It is therefore necessary to adapt the time horizon to the nature of the investment.

Diversification

It is the result of introducing different types of investment funds, with the aim of avoiding excessive dependency of the behavior of one fund or a category of funds.

Appropriate diversification and tracking of an asset allows for the limitation of volatility on a portfolio, with the consequence of limiting risk.

 
How much money is managed in investment funds?

Currently, there are 4257 investment funds operating globally. In Mexico, there is a total of MXN 481,3 billion invested in these instruments, accounting for more than 1.08 million individual accounts. In order to place this number into perspective, total assets under management in Afore is MXN 564,6 billion, which is 15% more than all the asset managed in investment funds. As at the close of November 2005, these assets represented 5.8% of Gross Domestic Product.

Information up to November 2005
Fund Type

Total Assets

(Million Pesos)

Number of accounts Number of funds
Mutual Funds 70,819 37,630 109
Fixed Funds (Private) 275,249 847,249 187
Fixed Funds (Companies) 92,335 41,368 82
Debt 69,749 172,300 47
Total 508,154 1,098,549 426

Warning!

Past results are no indication of future performance. In spite of good track record, and the fact that in the past a fund has had satisfactory returns and on occasions with results in excess of its "benchmarks" does not guarantee that these same results will be achieved going forward.