Investing into Mutual Funds

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Share • Advantages • Cost • Types of Securities • Types of funds

Currently, our offer of investments into mutual funds is increasing.

Mutual funds pool assets from investors, both physical persons and legal entities, and invest into various, and often very sophisticated, instruments on the financial market. Mutual funds are administered by the manager of the fund, who decides the method of investing the entrusted assets.

A Share and Its Price

When investing into a mutual fund, you purchase a share. The amount of shares that you purchase depends on the size of your investment, the price of the mutual fund (which is determined by the net asset value of one share in the fund) and also on the fees that are payable when investing into the mutual fund. It is likely, for example, that you will invest into a mutual fund with an initial investment fee. If the price for one unit (share) of the fund is CZK 20, the fee is 3 percent and you invest CZK 50,000, the price you will pay per share will be CZK 206 (the net value of the share plus fees) and the number of purchased shares will be 242.72 (CZK 50,000/206).*

The net asset value of the fund (NAV) is calculated daily, because the value of the assets must change every day depending on movements on the stock markets, money markets and bond markets.

* Compared to an investment into shares of a company, when investing into a mutual fund, you can often own a part of a share.

Advantages of Investing into a Mutual Fund

Diversification

One of the most important advantages in investing in mutual funds is diversification. That is a term investors use that means more or less not to put all your eggs in one basket. Mutual funds are diversified because they own many different types of securities.

Let us compare an investment into a mutual fund with an investment directly into the shares of a company; if we invest a large sum of money into an individual stock or bond, the value of the investment is going to be strongly affected by the movements in the value of that stock or bond. If the value increases, then we will profit. But if the price of the stock or bond decreases, we could lose a large portion of our investment. In mutual funds, where a large number of securities are pooled together, the risk of the price of all the securities decreasing at the same time is much lower. Diversification must be the measure of stability, because it helps protect the fund against the výkyvy of the securities.

Professional Management

The second advantage is professional management. As we mentioned before, mutual funds are administered by professional managers, who choose the best securities for the fund, based on the strategy or investment goals of the fund. This means that you do not have to be an expert in investing or spend large amounts of time comparing different stocks and bonds.

Liquidity

The third advantage of mutual funds is liquidity; the ability to get your money back in a relatively short period of time. Compared to a time deposit, where your money is deposited for a particular period of time, mutual funds enable you to access your assets easily, as easy as using the telephone. You can pick up your money or transfer your assets from one mutual fund to another. Compared to a time deposit, however, income from an investment into a mutual fund can vary so you can lose as well as earn money when you sell your shares.

How do the investments cost?

When you compare the expenses related to investing into a mutual fund with the time which you would most likely spend on your own research of individual securities, you will find that investing into a mutual fund is very reasonable. And many investors also find that compared to the fees for buying and selling individual securities, the costs of investing into mutual funds are lower.

Overall, mutual funds have three types of fees. All funds charge fees for portfolio management, which covers incurred expenses. These fees are calculated into the price of the fund every day (the price of a share is ‘net’, thus including all fees and other expenses), so you do not pay them directly.

Most mutual funds have a purchase fee, which you pay along with your initial investment. Mutual funds that do not have any purchase fee are called ‘no load’ funds. Sometimes, by paying a purchase fee, it is possible to shorten the purchasing process, so that the longer it takes to make your investment, the lower the purchase fee. Considering that an investment into a mutual fund is meant to be longer term, these types of funds are especially advantageous, because when investing for longer than 3 years, for example, then no purchase fee is paid.

Types of Mutual Fund Securities

It is possible to distinguish between several different types of mutual funds. These funds primarily vary by the type of securities into which they invest (for example, stocks or bonds).

We distinguish between three basic types of mutual funds:

Stock

Is the ownership of shares in a particular company. Stocks in economically stable markets generally show long-term growth, which means that they have the potential to achieve higher income than the other types of investments. It is important to realize, though, that the price of stocks also fluctuate more (higher, as well as lower) than other types of securities.

For this reason, this type of security is advantageous for long-term investment.

Bond

Is the debt of a company or state organization. Profit from the investment is made in the form of interest payments and their value (the amount for which they were originally issued) is repaid, if they are held until the date of maturity. Because the value of bonds can fluctuate in value, primarily due to movements in interest rates, investors can earn or lose money if they sell the bond before maturity.

Short-term Money Markets Instruments

Are investments into short-term bonds and other financial instruments of the money market with a maturity of less than 3 years. These securities pay interest and often are more stable. In the long term, however, they usually provide the lowest income.

Types of Mutual Funds

Every mutual fund is made up of one of these types of securities (Growth and Income funds, though, can own stocks as well as bonds). As you can imagine, each type of fund behaves similarly to the types of securities which it owns.

Money Funds

Money funds invest into short-term securities that are issued by issuers with a high credit rating, such as deposit certificates, government securities and quality commercial paper.

If the money funds pay dividends, you can reinvest this income automatically or have it paid immediately. The amount of the dividends fluctuates depending on the conditions on the market.

Money funds are considered to be a conservative type of investment. They can be advantageous for people, who invest for the short term or who do not want to risk losing part of their investment.

Bond Funds

Bond funds invest primarily into bonds: debt instruments issued by companies and governments. Bond funds pay regular dividends and are advantageous for investors who would like to have regular income. Just as for money funds, the amount of the dividends paid depends of the movements of the financial markets.

Bond funds differ from money funds in two ways; they have a tendency to make more money (due to the longer maturity and the variable quality of their investments) and also tend to oscillate more (due to price fluctuations).

This fluctuation means that there is a risk of losing a part of your investment, depending on the difference between the price of the share when you buy and when you sell (of course, the price of the share can move to your advantage).

Stock (Growth) Funds

Stock funds invest into stocks, which are ownership shares in companies that have issued them. These funds are often the most advantageous for people who want to invest over the long-term, of at least 5 years.

The primary thinking behind stock funds is that while prices of shares in the short-term fluctuate significantly, historically they tend to have higher profits than investments into the bond or money markets. While on any single day the value of your investment into growth funds can rise and fall, over the long-term your income should be higher than if you had invested into a money or bond fund. However, we cannot forget that with the greater potential also comes a greater risk. The value of stock funds generally fluctuate much more than other types of funds.

Balanced Funds

Balanced Funds own securities of all types of investments: stocks, bonds and short-term instruments. In this way, they try to limit the risk and lower the fluctuation of all types of investment instruments. These funds are unique in that, based on fund managers’ economic and market expectations, they can change the portion that individual types of investment instruments represent in the fund. There exist different types of balance funds; some are aggressive, primarily investing into stocks, and some are more conservative, focused on the income from bonds and short-term instruments. Because all allocation funds invest to a certain degree into stocks as well as bonds, the price of the shares of the fund can fluctuate.

For this purpose, it is possible to use balanced funds as normal growth or dividend funds, because there are heterogeneous types of securities in the fund.

Important notice

Investment instruments are not bank deposits and are not insured by any governmental institution neither a relevant deposit protection scheme, such instruments are not under any other obligations guaranteed or insured by Citibank Europe plc, Citigroup Inc or by any of their affiliated companies directly or indirectly controlled by Citigroup Inc, save where expressly stated under a valid status/prospectus or other constitutive document which govern terms and conditions for particular investment instruments. Investment instruments are a subject to investment risks and carry the risk of possible loss, including the risk of loss of principal invested. Past or expected income on investment instruments is not a guarantee of any future income. Value of investment instruments can go up and down. Return of principal invested to investment instruments is not guaranteed and expected or possible income on investment instruments is not guaranteed. Investment instruments may be subject to currency or foreign exchange fluctuations, including the risk of loss of principal invested. This is not an exhaustive list of risks – for details please contact your personal banker.

Relevant investment services provided by Citibank Europe plc through its branch located in the territory of the Czech Republic are provided exclusively within such territory and generally only to tax residents of the Czech Republic (as defined in Section 2 of Income Tax Act Nr. 586/1992 Coll., as amended).

Investment instruments are restricted for offering to so-called individual persons of:

1. United States (U.S. Persons) which means: a citizen of the USA or a holder of US green card or a resident of the USA for a tax purposes of federal income tax assessment.
2. Ireland (Irish Persons) which means a citizen of Ireland or a resident of Ireland for the tax purposes of income tax assessment, who are in the time of passing of instruction for subscription/redemption/switch of investment instruments distributed by Citibank Europe plc physically presented in territory of Ireland. Citibank is not allowed to accept from citizen of Ireland any instructions for subscription/redemption/switch of mutual fund units domiciled in Ireland.
3. Australia (Australian Person) which means a citizen of Australia, who is in the time of passing of instruction for subscription/redemption/switch of investment instruments distributed by Citibank Europe plc physically presented in territory of Australia.

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