Investment Funds

An investment fund is a form of collective investments that pools money from investors. The pooled assets are then invested in different types of properties with the purpose of getting a profit and decreasing investment risks, all in accordance with the investment goals specified in its prospectus.

The assets of an investment fund are in the ownership of members of the investment fund, in proportion to their share in the fund, and it is separate from the management company that manages the fund. Investment funds are regulated by the Law on Investment Funds the Securities Commission supervises their operation.

By investing in an investment fund you have gained an easy access to the capital market and your assets are managed by experienced and licensed experts.  Your portfolio manager diversifies the portfolio by investing in a larger range of securities and decreases the investment risk. The advantage of investing in an investment fund is that you can withdraw money from the fund at any moment. The return you might get from investing in an investment fund is usually higher than the return on a more conventional form of saving.

Open-end investment funds pool money by means of issuing investment units and redeem them at the request of fund members. Open-end funds invest in liquid marketable securities and investors can invest or withdraw their money on a daily basis.   

A closed-ended fund pools money in a public offering of shares. Once the public offering is closed, investors who bought the shares of the fund may trade them on the secondary market at their market price which might be lower or higher than the net asset value of the fund. The fund’s management company must have the shares of the fund admitted to the regulated market within 3 days of the day of receipt of the decision on their issuance. In addition to securities open-end funds invest in, closed-end funds may invest in real estate and in companies not traded on the regulated market and therefore the might entail more risk than open-end funds.   

Private funds are organized as limited liability companies and as such are not limited regarding their investment strategies. These funds are for experienced investors, the minimum investment amounts to EUR 50,000.

According to their investment goals, four types of open-end investment funds can be distinguished:

Money-market funds invest in short-term debt securities and cash deposits. As their name indicates, these funds aim to protect the investments and shield them against inflation. These are funds that entail lowest risk. By investing in these funds, you will not earn high returns but also you will not have to fear a loss in value of your investment. The returns with these funds are typically higher than inflation and interest on bank deposits.   

Income funds invest into debt securities. Although the value of the investment might grow the main goal of these funds is to provide regular income to their members. That is why mainly conservative investors and older persons invest in the funds as well as investors who opt for a decreased risk on their portfolios. The funds generate return which is higher than with the money-market funds at the same time entailing a higher level of risk. The riskiness of the funds might considerably differ depending on the issuer of securities the funds invest in. Moreover, the funds are exposed to the interest-rate risks – when the interest rates grow, the value of the income funds decreases.   

Balanced funds invest in equity and debt securities. The aim of the funds is to provide a mix of safety, income and growth of invested assets. These funds are suitable for investors interested in moderate growth of their investments coupled with moderate risk.   

Growth funds invest their assets in equity, their aim is to provide high returns in the short or long term.  These funds invest the majority of their assets in shares and because of that they entail more risk than the mentioned funds.   However, the riskiness of the funds might considerably differ depending on the issuer of securities the funds invest in and their investment strategies. Primarily younger persons invest in these funds and persons with tolerance for high investment risk.

Depending on their investment policy and the type of assets they invest in, there are the following types of closed-end funds:  

Closed-end funds which invest in public companies - more than 50% of their assets in securities traded on the regulated market, 

Closed-end funds which invest in non-public companies - more than 50% of their assets in shares of companies which are not traded on the regulated market and shares of limited liability companies,

Closed-end funds which invest more than 60% of their assets in real estate.

Net asset value of a fund represents its asset value less the value of its liabilities. It is calculated on a daily basis after the close of trading. Considering the value of securities is changing every day, the net asset value of the fund changes daily. Net asset value is a good indicator of performance of investment funds.

An investment unit is a calculated proportionate share in the total net assets of open-end investment funds.

The value of an investment unit of an open-end investment fund is calculated as net asset value of the fund divided by the total number of investment units. Meaning, that if the net asset value of the fund is RSD 100,000, and the total number of investment units is 100, the value of one investment unit is RSD 1,000. If on the following day net asset value of the fund is RSD 10,000, the value of one investment unit will be RSD 1,100 (on a condition that the number of investment units did not change).

The initial value of investment units for all open-end funds amounts to RSD 1,000.

When an investor places money in a fund, the investor buys investment units.  The number of investment units is obtained by dividing the investment (less the purchase-of-investment-unit fee) by the value of the investment unit on the day of payment.  

Based on the number of investment units, any investor can calculate the value of investment in the fund as a product of the daily value of investment units and the number of units the investor holds. 

When investors wish to withdraw their investments from a fund, they can do so by selling their investment units to the fund. The money paid equals the product of the number of investment units and their value on that day, less the redemption fee (maximum 1%).

A fund’s portfolio manager decides on investments of the investment fund assets. Portfolio managers are licensed by the Securities Commission after successful completion of  the required specialized course. A management company must employ at least one portfolio manager to manage the investment fund.

Assets of a fund may be invested in debt securities, securities issued by international financial institutions, mortgage-backed securities, securities issued by domestic and foreign legal entities which are traded in the Republic of Serbia, certificates of deposits, cash deposits, financial derivatives, shares of closed-end funds, shares of investment funds, shares of joint stock companies, shares in limited liability companies registered in the Republic of Serbia and in real estate. Investing abroad is allowed in accordance with the stipulations of the Law and bylaws.

Each management company is required to have a Rulebook on Fees and to charge fees and expenses for each fund it manages in accordance with the rules thereof. However, one should know a difference between the fees and expenses management companies charge from investors.

Fees represent a source of income for management companies and they are charged for management services. 

The following fees are associated with open-end funds:

•  Front-end load (purchase of investment units fee) – this load is charged as a percentage of the investment in a fund (it reduces the amount of the investment, the fee is charged and then the remaining part will be used for purchase of investment units);

•  Fund management fee – is an annual fee calculated on a daily basis as a percentage of the assets of a fund; 

•  Redemption fee – another type of fee, it is charged when a member of a fund whishes to withdraw from a fund and to cash/sell his/her investment units;  

Bear in mind, only the redemption fee is legally limited to 1%, all other fees are determined by management companies alone.  Closed-end funds charge only the annual management fees since trading of shares is conducted on the regulated market through broker-dealer companies, and the costs are the same as with any trading of shares.  The costs charged from the assets of a fund pertain to the costs of securities trading  (broker-dealer commissions, Stock Exchange commissions and of the Central Depository fees) as well as custody bank and external audit costs. 

Fees and expenses of a fund may significantly reduce the returns realized by investing, therefore it is very important to understand and review carefully the fee tables of the fund you are considering. On the other hand, high fees and costs do not necessarily translate as bad, if they mean highly professional expert portfolio managers manage the fund, and that the fund actively invests, which might lead to very high returns.

Successful performance results of a fund cannot be guaranteed. Past performance is not necessarily indicative or a guarantee of future results. By investing in a fund you bear certain risks. Depending on your willingness to take chances, you may opt for the type of the fund that best suits your needs. Funds with riskier investments potentially have higher returns, while funds with relatively conservative investment policy, such as money-market funds have lower returns but also less risk implied.

The returns of a fund mean the appreciation or depreciation of the value of the fund's assets over a specified time period and usually expressed as a percentage. The returns of the fund are not the same as the returns experienced by investors in the fund because individual investors may have invested, redeemed or sold their units in the fund at time periods that are different than the beginning and ending of the time period used to measure the fund's returns. The returns of a fund are published in its prospectus and on the fund's website every six months for the last 12 months, as well as the total return for the last five years of operation of the fund.

Prospectus of a fund is a document open-end or closed-end investment funds are required to have and that investors have to read prior to becoming members of the fund. The prospectus is there to provide information to investors about the management company and its fund, the main risk associated and the investment policy of the fund.  There you can find information about:
1) The investment fund,
2) Its management company,
3) Fees and expenses charged,
4) The date of issuance of the prospectus. It is very important for each potential investor to read and understand the content of the prospectus and to get acquainted with the terms offered by the fund as well as the risks and expenses pertaining to the investment.

When you sell investment units or shares (when you withdraw your entire or partial investment) capital gains tax is payable in the amount of 20%. The capital gain is considered to be the difference between the price you got when you sold investment units/shares and their purchasing price.    

When receiving dividends from a funds returns, capital gains tax is payable in the amount of 20%. The basis for calculation of the tax is 50% of paid returns.

When you invest in an investment fund, your money will be managed by a Portfolio Manager and invested in a diversified portfolio, decreasing the risk you bear. At the same time, you are paying a fee for the service, which decreases your returns.

When you invest directly, through a broker-dealer company, you decide on your own where to invest, and the number of different securities you can invest in is limited by the money you have for that purpose.  No fees are payable to a management company but the investment risk can be high, if you do not diversify your portfolio adequately. It is also necessary that you possessed some knowledge about the matter and to dedicate some time to analysis of securities and monitoring of your portfolio.

There is a possibility to engage a broker-dealer company licensed to perform portfolio manger activities to invest in securities, instead of you and for your behalf, following their own choice (by their own judgment and assessment) and to create a portfolio for you. On that occasion, you are paying a fee for these services, as with management companies only maybe even higher.

Portfolio diversification is a means of decreasing investment risk by investing in different securities of different issuers.  In this way, only a part of the portfolio may decrease in value and such depreciation can be even compensated by an increase in value of the other part of the portfolio (if negatively correlated). Of course, in order to diversify a portfolio (according to some theories, a minimum number of shares for a well diversified portfolio is 15), significant resources are required, which are usually not in possession of small investors.

The Securities Commission supervises investment funds. The Commission may pronounce a public warning, initiate proceedings before a competent body, withdraw approval to management members and director and suspend issuance of securities for a period of up to three months. The Commission also has the authority to revoke licenses from management companies.

The Law on Investment Funds is created following the concepts of the best international practices in regulation of these institutions. It provides for a series of control mechanisms, which increase safety of investing in investment funds and safeguard investors from fraud and abuses. Thus, for example, the Commission grants approvals to holdings that exceed 10% and to management members. Assets of the funds are completely separate from the assets of the management company and they are kept with a custody bank. The custody bank controls calculation of fund asset value and checks whether investments are in the line with the fund’s prospectus. Marketing should also meet the set standards so that potential investors are correctly informed.

However, the regulations may add to the adequate information about the risks implied when investing in a fund, but it is on investors to make an investment decision and to bear the risk thereof.  As there are no limitations regarding the potential returns, there are no limitations to potential losses as well. Therefore, it is crucial the citizens understand the risks and estimate whether the funds are the right choice at all. If so, choose the type of the fund that best suits your needs.