Investment funds are not all cut from the same cloth: The world of investment funds is very colourful and contains a variety of offers. When it comes down to the details, funds differ greatly according to the type of investment and financial products in which they may invest as per their fund rules. To find the right fund amongst the existing 1,900 or so funds (source: OeKB, as of December 2021) offered by Austrian asset management companies is not an easy task (see also: How do I find the right fund?). Here are the most important fund types:

Actively or passively managed funds?

Actively managed funds: This fund type is actively overseen by a fund management team. This team, which makes use of extensive market and company analyses, takes care of the fund’s investments. It positions the fund assets in a targeted manner pursuant to the stipulated fund rules. In the case of equity funds, for example, this affects the buying and selling of individual instruments according to the market situation and therefore their different weightings in the portfolio. It must be noted though, that capital losses may occur in the case of actively managed funds as well.

Passively managed funds: This type of fund (also known as an ETF or index fund) is designed in such a way that its portfolio automatically mirrors a specific market (for example, the Austrian equity index ATX), entirely without fund management. This means that the investment will develop in conformity with the market based on the selected market index – but also not more than that.

Funds: What investment focuses are there?

The investment focus is the criterion that fund managers adhere to when selecting the securities that the fund assets are to be invested in. The investment focus has a decisive influence on the returns and on the risks associated with the given fund.

Funds according to asset classes

Equity funds: These funds invest in equities, i.e. in company shares. Equity funds can fluctuate more strongly than, for example, bond funds, but they also provide better opportunities for returns in exchange for higher risk.

Bond funds: Bonds can be regarded as debt instruments which companies and national governments use to borrow money. In exchange, they generally pay interest to investors. Bond funds combine various bonds. Their prices develop in line with the corresponding yields on the financial market. For this reason, the opportunities for returns are relatively low during prolonged phases of low interest rates.

Mixed funds: This type of fund does not invest in only one asset class, but in multiple asset classes. For example, a mixed fund can consist of a mixture of equities, bonds, and commodities.

Funds of funds: These funds invest their capital in the units of other investment funds as well as in other asset classes (such as alternative investments, commodities, or real estate). Funds of funds are characterised by a higher risk diversification than other types of funds, although even here, loss of capital cannot be ruled out.

Investment funds also allow the investment focuses to be controlled with regard to the following:

Single-country and regional funds: Funds from this investment category focus on selected countries or regions (e.g. bonds from the DACH region – DACH stands for Germany [D], Austria [A], and Switzerland [CH] – or equities from Asia).

Theme funds: These are investment funds which focus on a specific sector of the economy, on a specific industry, or on a particular theme (such as alternative energy, biotechnology, or the digital economy).

Income-retaining or income-distributing funds?

Income-retaining funds: As the name suggests, income-retaining funds accumulate the returns they generate. The term “reinvesting” is perhaps a bit easier to understand. Income-retaining funds invest the returns from interest or dividends back into the fund volume and thus increase the fund’s unit value. Therefore, in the case of equity funds for instance, more shares are automatically purchased for the investors. In principle, these reinvestments can be compared to compound interest. Income-retaining funds are more attractive to investors who want to build up their capital over the long term. Due to price volatility, however, loss of capital cannot be ruled out in the case of investment funds.

Income-distributing funds: In contrast to income-retaining funds, income-distributing funds pay out a portion of the fund assets to the unit-holders – these are often the earnings generated based on the given fund type (e.g. price increases, coupon payments, dividends, etc.). The unit-holders can then use the distributed funds however they see fit. (Income funds are funds designed specifically for the purpose of distribution.)