Investment funds for idiots...

Wertz

I'm looking for a reasonably simplified explanation of the procedures surrounding putting money into investment funds.

I currently have a lump sum sitting in a rabo acount but every so often I'll get mail telling me of this or that fund....trouble is I don't know WTF a fund is, what it entails, what entry fees are, how it works and what the risks are. I also don't know if it's even for me but if it offers a slightly better (if unsure) return than a savings account, I might be interested in sticking my toe in the waters.

As someone who didn't even do basic business studies at school, I'm lost with a lot of the terms and phrases bandied about.

If anyone has the time I'd prefer a basic, plain english explanation (not links or "google it") and maybe some input from anyone who has had good or bad experiences with investment funds (either from rabobank or others).

Or is it a case that if I don't know what they are they're not really for me?

hmmm

Ehm I'll try and help somewhat, hope it's not too basic.

An investment fund pools the money from thousands/millions of people and uses it to buy whatever it is the fund says it will invest in - usually shares. There will be a manager (e.g. Irish Life, Merrill Lynch) who runs the fund and decides what to invest in. These managers will buy and sell shares and try and maximise the amount of money the fund makes. That pool of money is divided into units, which are a small part of the total fund. If you want to put your money into the fund, you can buy these units (and later sell them).

Each fund should have a prospectus (or something similar) which says what the fund is aiming to invest in. This could be anything, so you'll come across funds that invest in e.g. Irish shares only, European shares, Technology companies and on and on. Each fund will have a risk rating of some sort - higher risk funds offer the chance of making more money, but you might also lose more money. Cash and Bond funds offer lowest risk, but make very low returns.

The advantage of buying into a fund is primarily three things
1. You spread your risk. A fund will invest in hundreds of different shares - some of those shares might go bankrupt, others might double in value. Because the money is spread across lots of shares, you won't lose out much if one of the picks turns out to be bad. If you invest in shares directly, you run this risk
2. Someone else manages your money and is a professional. You just put your money in and go back to watching TV.
3. You decide what type of fund you want to invest in. E.g. there are funds which invest very conservatively and will aim to make steady but unspectacular returns. Other more exotic funds invest in e.g. biotech or Brazil. With these funds you might see huge returns one year, and lose money next year.

Downsides:
1. You have to pay a management fee every year to the manager - you should aim to invest only in funds with small fees.
2. There may be a bid and offer/entry and exit fee. Rabo charges you .75% usually when you first put your money in and also when you take it out.
3. Funds will show their past performance figures e.g. "this fund made 20% a year over the past 5 years!". It might lose 50% next year, past performance is no guarantee. The only past performance figures I usually look at are 5 and 10 year performance.
4. Managed funds on average will not beat the market. I.e. if the ISEQ goes up 20% this year, most managed funds will increase by less. It might seem odd with all these professionals managing your money that it appears they would make less than a monkey throwing darts at shares, but it's a fact and causes a lot of debate. Because of this, you may come across "index funds" which try to track the share price index only.

Your choice of which fund (or funds) to put your money into should be based on how much you can afford to risk your money, how young you are etc. If you're young and have some spare money you won't get too upset if you lose, you could try putting money into say a Chinese or Biotech fund. The majority of your investment however should be in conservative, boring funds however.

Index funds (or ETFs which are a close relation) would be my choice for the average investor who just wants to invest his money and get on with their life. Investment funds are a good second choice.

Wertz

Yeah that's more or less the kind of explanation I'm looking for...thanks for taking the time to reply.

But a few things:

Is it like a fixed term investment where you choose how long you invest your lump sum?
If so, what's the recommened time frame to invest for?

How is interest/return/dividends paid...annually? Or when you withdraw your investment? Would they too become part of the investment, themselves going on to produce a dividend....or do they get paid into a separate account?

Would DIRT (or equivalent) be paid on returns automatically or do I have to start messing about with paying the revenue myself?

If things go bad, just how bad can they get? I mean am I as likely to loose 10% of my capital as I am to gain 10%?

Can you explain entry and management fees a little further?
I mean do I pay a % of my capital initially at entry(to rabo) and then a fixed % per year on that capital (whether it has accrued or lost value) to the managers?

hmmm

Wertz wrote:

Is it like a fixed term investment where you choose how long you invest your lump sum?

If so, what's the recommened time frame to invest for?

There's no end date, so you can invest for as long as you like. Most people would advise that you invest for at least 5 to 10 years. Because they're mostly shares, there may be some bad times (e.g. dot com crash) which will see your investment drop 20/30%, but the good times should see you recover. If you'd put your money in just before the crash in 2001, you'd only be breaking even now.

How is interest/return/dividends paid...annually? Or when you withdraw your investment? Would they too become part of the investment, themselves going on to produce a dividend....or do they get paid into a separate account?

Usually there's no dividend paid, the manager reinvests the dividends back into the investment fund. Because you pay top rate of tax on dividends usually, that's a good thing for most people. The return is the capital appreciation i.e. the price per unit goes up, so that when you come to sell your units you get more back than you put in

Would DIRT (or equivalent) be paid on returns automatically or do I have to start messing about with paying the revenue myself?

Rabo are unusual in that you have to sort out your tax yourself. That's a pain in the hole to be honest, I'd give Rabo or the Revenue a ring when you do go to sell and ask them to explain. You only have to pay tax when you sell your units. Most funds will deal with the tax internally and you will get paid free of tax.

If things go bad, just how bad can they get? I mean am I as likely to loose 10% of my capital as I am to gain 10%?

You could, and the riskier funds will be more volatile. Over long terms though, shares (and funds) should hopefully prove to be a good investment, but you have to be prepared to ride out the ups and downs. Make sure to pick funds with low fees.

Can you explain entry and management fees a little further?
I mean do I pay a % of my capital initially at entry(to rabo) and then a fixed % per year on that capital (whether it has accrued or lost value) to the managers?

Yup - entry fee is paid once on your initial investment, there will be an annual management charge on whatever you have invested, then finally a once off exit charge. Quinn life offer some good choices in funds with no entry or exit charges and management fees of about 1.5%, so they're some of the best I've seen in Ireland

Wertz

Big thanks for all the info, definitely cleared things up for me a lot.
Looks like I have some thinking to do on this.

Still interested to hear from others who have had good or bad tidings with funds in the past, for the sake of persepctive.