As granny used to say, “Don’t put all your eggs in one basket”. Diversification is an important issue for every investment portfolio. To diversify means to invest our wealth in different instruments, which significantly reduces risks associated to instruments individually. In addition, it is the best way to maximize results and minimize risks in the long term.

To diversify means to keep the proper mixture of different types of financial instruments (different markets, different terms, different currencies, etc.)

What’s an Investment Fund?

Investment Companies or Investment Funds were created to channel savings of small and medium-size investors into the securities market (money and capitals). In other words, an Investment Fund is an instrument whereby different investors with common objectives join their resources to be managed by a professional team to be invested in different financial markets.

What are the advantages of investing in a Fund?

1. Yields: by joining the different investors’ capitals, access to instruments with more benefits related to rates and terms.

2. Diversification: investment in a fund is performed through an investment basket, that is to say, all resources of a fund are invested in different instruments and different terms.

3. Liquidity: the option to select the fund according to capital availability. Some funds offer money availability day by day.

4. Professional Management: to invest in funds guarantees to have a group of specialists available to advice you. They are constantly looking for opportunities within the financial markets to maximize your yields.

From the Surface… to the Fund!

More advantages for the Investor

Investment through these instruments is convenient for investors with limited resources or do not have the time to administrate their investments because, by purchasing representative shares of these companies capitals, they automatically participate in the Stock Market.

What are the advantages to the Economy?

Funding through investment companies is very useful for the country’s economy, as they are channeled to private or public entities for their operation or for the long term development projects implementation which require financing. To guarantee their commitment before those who contribute these resources, companies and institutions receiving the resources issue instruments, and these, are used to create the investment portfolios that are managed by the investment companies.

What are the advantages for public or private entities and/or companies?

For entities they represent the possibility to be financed by issuance and placement of instrument that, through investment companies are accessible to small and medium-size savers who otherwise would not be able to participate in the market. Another advantage for the companies, during budgetary surpluses, they have an investment alternative to take advantages of those Treasury surpluses. For the case of Investment companies debt instruments for legal entities.

How many types of Funds or Investment Companies are there?

According to the Investment Companies Law there are three types, the two most important are:

a) Investment Companies in debt instruments.

These companies can only invest in debt instruments; net profit and loss is daily assigned among shareholders. The first companies began operations by the end of 1983, and basically were established as money market funds, in other words, the basic features offered by these companies were high cash availability and yields, and therefore, their portfolio was invested in money market instruments.

The following are the possible purchasers for these types of Investment Companies:

Individuals or legal entities, both Mexican and foreign; credit institutions; trusts; departments and entities of the federal and states public administration; municipalities; pension and savings funds; insurance and bonding companies; credit unions; leasing companies.

Some of their features are:

• They represent a low risk investment instrument, with attractive yields and cash availabilities.

• They receive additional resources to finance instruments of the money and equity markets.

• Due to their nature, purchased issues are taken up to their maturity

• With interest rates hikes, when adjusting prices of the investment instruments market, the price of the company may decrease, adjusting upwards their new yields.

• Automatic reinvestment.

• Constant valuation of assets.

What are the features of the different Debt Instruments Investment Companies?

b) Equity Investment Companies

They were the first to appear in the country and their assets are invested in equity securities and debt instruments. Individuals or legal entities are available to invest.

The investor gets a capital profit consisting in the difference between the selling price and the buying price. This profit is tax-exempt for individuals and is cumulative for legal entities.

Which features do different Common Investment Companies have?

Is it better to invest in just one fund or in several?

Diversification is equivalent to reducing risk, and the greater is the rate of diversification, profitability fluctuation or variation in the medium and long terms will be lower.

Through diversification it is possible to create multiple market and assets combinations with different profitability/risk levels.

Different asset types usually behave in a different way under the same market conditions. Through diversification among the most important markets: debt, stock, currencies, etc., reducing the risk of placing all the capital in just one type of instrument.

Shall I invest in Equities?

Profitability of these funds is linked to the stock markets evolution. This makes possible both high profitability earnings in short time terms, and other terms where profitability can be negative. These are funds with a high risk level.

This type of funds is suitable for those investors with high yields expectations in a long term and ready to assume the pertaining risk in the short term.

What are the most common concepts about funds?

Volatility

Volatility expresses the degree in which the results of one asset disperses or fluctuates related to its mean yield within a certain period. Volatility is low if such fluctuations are considered as minor and rare (results close to the mean value). On the other hand, volatility is high if results present frequent and great variations related to their mean result (very disperse). Volatility is measured through the “Typical or Standard Deviation”.

Correlation

Correlation measures the relation degree between two assets during a certain period. A perfect correlation exists when two assets behave exactly the same way. Correlation varies between +1 and -1.

Risk

It is the possibility of the decrease, or even loss, of the value of an asset.

Time

The Investment horizon is an estimate of a period of time to elapse to increase the probability to achieve the expected yield. The knowledge of investment horizon is closely linked to volatility. The higher is volatility, the investment horizon must be prolonged more. Hence the importance of a time horizon adapted to the investment type.

Diversification

It is the result of the introducing several investment funds types, to avoid an excessive dependence of only one fund or category of funds behavior. The proper diversification and its active follow up allow limiting volatility of a portfolio and, consequently, limiting risk.

How much money do Investment Funds or Companies manage?

Currently, Investment Funds are 4,257 in total; they count on a total of $481,332 million pesos in assets and in more than one million 80 thousand accounts. To put it into perspective, AFORES currently manages $564,617 million pesos, in other words, their assets are only 15% higher than the assets managed by Investment Funds. By the end of November, 2015 assets represent 5.8% of the Gross Domestic Product.

Alert!

What has happened in the past does not guarantee the same results may be given in the future. Even though it is a good “benchmark”, the fact that the past had satisfactory yields and sometimes with higher “parameters” or “benchmarks” results, this is no guarantee that the same yields will be the same.