Investment fund risks

Investment fund risks

An investment fund is a collective savings instrument in contractual form, which results from the investments of several investors, the set of these investments constituting an autonomous patrimony, belonging to a plurality of natural or legal persons, called participants. Monetary Funds are investment funds whose investment tendency consists mainly in the preservation of the invested capital, with the aim of minimizing the investment risk of the clients and, at the same time, obtaining a return in line with the rates of return practiced in the money market.

An investment fund is a way of investing money alongside other investors in order to take advantage of the advantages inherent in the assets , such as reducing investment risks by a significant percentage. What are the risks of investment funds?

What are the risks of investment funds?

Before talking specifically about the risks, it is important to highlight that when talking about investment funds, the main risks are linked to the assets in the fund portfolio and not to the fund structure itself. Therefore, it is the assets purchased by the fund that will determine the majority of the risks to which the fund is exposed.

The risks in investments are usually evaluated through five different perspectives. Depending on the investment fund strategy, it will be more exposed to some types of risk than others, so it is important to evaluate each one.

Capital Risk

Capital backed investment funds are unusual. The higher the risk class to which the fund belongs, the greater the potential for asset portfolio valuation, but also the greater the probability that losses will occur, especially in short investment periods.

Market Risk

In securities investment funds, stocks, bonds, raw materials, exchange rates and other assets that make up the assets are usually quoted in the capital market and therefore suffer price fluctuations, at least that there is the possibility of losing part or all of the capital. In real estate investment funds, the income obtained is subject to the conditions of the real estate market, i.e., it depends on the variation of the prices of the goods and the conditions of the rental market.

Remuneration risk

The income generated by the funds is not known at the time of acquisition of the investment units, depending on the evolution of the stock prices of the assets that comprise them. The income generated by the funds may be regularly distributed to participants. In this case, they are called distribution funds. When income is not distributed, the funds are called capitalization or accumulation.

Liquidity Risk

Investment funds, especially those that are open-ended, generally have high liquidity. The redemption rules should be included in the mandatory documents for the constitution of the respective funds. In the case of closed-end investment funds, the investor will normally have to keep the units until the liquidation of the fund. It is possible, however, for them to be sold before this deadline, provided that the intermediary finds another buyer for them

Foreign exchange risk

s of the uncertainty about the value of the currency as a result of exchange rate fluctuations. Therefore, it can be understood as the probability that the exchange rates between the currencies of the exporting countries move inversely, between the quotation date and the settlement date of a trade.