What you should consider before purcha­sing a fund

Fund universe – What are funds and how do they differ?

Essen­ti­ally, a fund is a finan­cial product that pools money from many investors and invests it in various asset classes such as stocks, bonds, or real estate accor­ding to a defined strategy. A simple compa­rison: a fund is like a fruit basket that contains a variety of fruits, not just apples. This means you always have a choice and still benefit even if a parti­cular fruit is not so good.

Funds differ based on various criteria:

Asset classes

• Equity funds invest in listed compa­nies. They offer high poten­tial returns, but are more volatile and are suitable for a long-term invest­ment horizon.
• Bond funds focus on bonds, are more stable, but offer signi­fi­cantly lower returns – ideal for medium-term invest­ments.
• Money market funds invest in govern­ment bonds, time deposits, or short-term corpo­rate bonds. These invest­ments are considered lower risk but offer less poten­tial for returns. Ideal for a short invest­ment horizon.
• Mixed funds combine diffe­rent asset classes such as stocks and bonds and appeal to investors with a medium risk appetite.
• Those who want to speci­fi­cally track trends can turn to thematic or sector funds. These include techno­logy, health­care, sustaina­bi­lity, artifi­cial intel­li­gence, water, and many more.

Additional criteria must be considered for thematic funds. An estab­lished fund provider with a clear focus on quality and trans­pa­rency is a good sign. The same applies to fund managers with experi­ence and a stable team. Indepen­dent rating agencies (e.g., Morningstar), seals of approval such as sustaina­bi­lity ratings, and awards also provide indica­tions of a fund’s quality.

Manage­ment style

• Actively managed funds are actively managed by fund managers and pursue a specific goal. This agility is parti­cu­larly advan­ta­geous in niche and thematic markets, small caps (i.e., smaller listed compa­nies), and emerging markets. In these markets, it is important to separate good invest­ments from bad ones based on knowledge and experi­ence in order to generate the best possible returns for investors. One example of this is our specia­lized water fund. The downside is slightly higher manage­ment costs.
• Passive funds, such as ETFs or index funds, track an index (market), are signi­fi­cantly cheaper, and are well suited to broadly diver­si­fied, long-term invest­ment strate­gies. There is no active inter­ven­tion in the event of market fluctua­tions.

Fund Struc­ture

• Physical funds actually own the assets (e.g., stocks). The fund holds the securi­ties in which it invests. This means that investors parti­ci­pate in the real assets through the fund. This struc­ture is recom­mended.
• Synthetic funds do not directly own the assets. Instead, they repli­cate the perfor­mance of the desired assets using finan­cial instru­ments, allowing investors to parti­ci­pate in their perfor­mance without the assets actually being held in the fund. This creates additional risks, as investors are depen­dent on the solvency of the issuers. Overall, the functio­ning and risks for investors are often less trans­pa­rent.

-> You can find out whether a fund is physical or synthetic in the fact sheet. Either in the descrip­tion of the fund or in the key data. Certain online tools also allow you to filter by this criterion. On www.justetf.com, physical funds are referred to as “full” or “sampling,” while synthetic funds are referred to as ‘hybrid’ or “swap.”

Use of income

• A distri­bu­ting fund regularly passes on income such as interest or dividends to you. This means you receive regular payments directly from the assets held in the fund. Distri­bu­ting tranches are suitable for investors who want to receive regular income, e.g. to supple­ment their pension.
• A reinve­sting fund retains the income in the fund and automa­ti­cally reinvests it. This allows investors to benefit from the compound interest effect, as the income itself generates further income. Reinve­sting funds are ideal for long-term wealth accumu­la­tion.

Online tools can help you narrow down your search. There are many websites where you can narrow down and compare funds, similar to how you search for hotels on Booking.com. One such site for passive funds with many filter options is www.justetf.com/ch/. Other­wise, experts such as Tareno will of course be happy to help you.

Invest in your funds

Find the fact sheets for the handful of funds you filtered earlier and highlight the most important infor­ma­tion. Carefully compare the follo­wing key figures:

• Trada­bility: A fund should be tradable on a daily basis.
• Costs: The lower the costs, the more capital remains available for invest­ment. The costs of a fund are made up of various compon­ents:
  • Ongoing fund costs (TER): For passive funds such as ETFs, these are generally lower, between 0.1% and 0.5%. Active funds have higher costs, typically between 1% and 3%, and also differ depen­ding on the fund tranche.
  • One-time costs: These are sometimes charged once and come in various forms:
    • Front-end load: Calcu­lated based on the share value (my share of the total fund) when purcha­sing the fund. This can be up to 5%, but 0–3% is typical. For example, if I invest CHF 100 and the front-end load is 5%, only CHF 95 is actually invested in the fund. The remai­ning CHF 5 goes to the fund issuer to cover costs.
    • Redemp­tion fee: Very rarely charged on the share value when selling, and amounts to 0–1%. It is calcu­lated in the same way as the front-end load, but is applied to the sale value of the product.
  • External costs: These include, for example, custody, transac­tion, or advisory fees charged by your bank independently of the fund provider. Depen­ding on the bank, these are charged as a percen­tage of the invest­ment volume (usually between 0.1 and 0.5%) or as a flat annual fee.

-> Our tip: Pay atten­tion to the total costs, i.e. the sum of all the costs listed above. Even small diffe­rences can have a big impact on the perfor­mance of your fund in the long term. Check the fact sheet and ask your bank or asset manager to provide you with a trans­pa­rent overview of all the costs involved.

• Perfor­mance: A fund’s past perfor­mance can provide clues, but it is no guarantee of future perfor­mance.
• Fund size and duration: Check how large a fund is and how long it has been on the market. A fund that is too small carries the risk of possible disso­lu­tion, while a large fund with a long duration can be an indica­tion of stabi­lity.
• Right fund tranche: Many funds are available in diffe­rent tranches, i.e., variants of the same fund. They differ, for example, in whether income is distri­buted or reinve­sted, whether they are aimed at private or insti­tu­tional investors, in the currency, or in currency hedging.