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What are the possible ways to invest?
- Bank deposit
- Independent investment into stocks and bonds
- Mutual funds
The table below outlines the advantages and drawbacks of investment instruments:
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Aspect
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Bank deposit
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Independent
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Fund
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Open
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Interval
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Closed
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Level of yield
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low
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depends on personal professional skills
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medium
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above average
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depends on the Fund’s investment strategy
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Risk
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low
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depends on personal professional skills
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medium
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medium
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depends on the Fund’s investment strategy
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Investor skills
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none
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high
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minimal
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minimal
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minimal
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Taxation
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none
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15% annual tax on the difference between the income from the sale of the securities and the expenses on their initial purchase
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15% tax only on the Fund’s securities sale. Dividends on the Fund’s securities are subject to a 5% tax.
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Expenses
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minimal
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brokerage commission + fees for using a POS terminal + other expenses
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payments to the asset management company, depository, registrar, appraiser, and auditor, as well as other expenses related to the Fund’s management. Their total amount does not exceed 10% of the average annual cost of the Fund’s nets assets.
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Liquidity
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high
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depends on the instrument and the investment’s size
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high
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medium (depends on length and number of intervals)
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low (higher for the funds circulating on the secondary market)
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What is an investment fund?
An investment fund is a form of collective investment that gives an investor the opportunity to accumulate capital in a mutual fund for further investment. The capital is accumulated in the fund through the sale of its securities that reflect the investor’s share of the fund’s assets. Then, an asset management company professionally invests the capital into various types of assets, including stocks, bonds, deposits, and other instruments, in order to receive investment income and grow the fund’s assets.
Mutual funds are the world’s most popular alternative to bank deposits. It is important to understand the core difference between funds and deposits. When placing money in a deposit, an investor receives a specific stable income during a fixed period while the bank receives another part of the income from investing your money into various types of assets. As a rule, mutual funds offer much higher profits that are entirely paid to investors. At the same time, a fund cannot guarantee any fixed level of return.
In order to choose a fund that meets your financial requirements, it is necessary to analyze the investment strategy, i.e. types of assets, in which the fund invests. Depending on the assets in their portfolios, funds can bear lower or higher risks and bring lower or higher yields respectively. Equity funds bear relatively high risks, but usually bring high profits. Bond funds bear low risks, but their yield is more conservative.
There are also funds of mixed investments, so-called diversified funds, which are formed with various classes of assets in various proportions (for example, 50% - equities, 30% - corporate bonds, 20% - government bonds). The yields of these funds are essentially higher than those of bond funds, and the risk level is lower compared to equity funds.
What are advantages of investing into mutual funds?
High returns. Compared to bank deposits, mutual funds are co-owned by investors who receive the entire income from their investments, except for the expenses related to the funds’ management. At the same time, funds are large market players and can invest on better terms than private investors.
Minimization of risks. Mutual funds usually diversify their portfolios by investing into various types of assets, thus, minimizing risks. This strategy is employed when large amounts are invested, which are not always available to private investors. Even major corporations are not always able to track the changes in market quotations every day or perform revaluation of portfolios as professionally as asset management companies do.
Simplicity. Once an investor has entrusted his or her money to a professional investment manager, the investor will not need to learn the specificities of the stock market and track the changes of equity quotations on a daily or even hourly basis. Instead, the investor receives regular reports about the fund’s activity and the state of the investments. Another important advantage of funds is that the investor can sell his or her stocks/investment certificates at any time convenient to the investor.
Reliability. You may be certain that the rights of an investor are protected by the Law of Ukraine “On institutes of mutual investment (unit and corporate funds).” All aspects of an asset management company’s activity are regulated by the State Securities and Stock Market Commission, a custodian bank and fund’s auditor. An investor also can acquire a degree of control over the investment process when he or she becomes a Supervisory Council member.
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