What are Funds?

Funds are a form of collective investment scheme that allow you to invest indirectly in equities and other investments. Each individual investor buys units in a Fund. The money is pooled and invested by a fund manager in accordance with the Fund documentation. Funds which are authorised by regulatory authorities are generally required to publish a Prospectus and other documentation, which set out the rules under which the Fund will be managed. Other professionals are appointed to undertake various roles, including that of Administrator and Trustee, amongst others. Not all investment funds are authorised, however Davy Select make Funds available if they are appropriately authorised.  


Many Funds are authorised by regulatory authorities. These Funds are required to publish documentation for investors. 

Fund documentation

Authorised Funds are generally required to publish a Prospectus and other documentation setting out the rules under which the Fund will be managed. The Fund documentation includes:


Prospectus: A document that describes the Fund’s investment objectives and policies; identifies who manages the Fund; and explains the Fund’s fees, charges and expenses. 


Prospectus Supplement: A document specific to the Fund, which is written to update the descriptions in the Prospectus.


Key Investor Information Document (KIID): A document providing summary information on the Fund, including the objectives, risks and fees that apply. 

Funds which are authorised are required to publish a Prospectus (which may contain information on a number of different Funds where they are managed under the one Unit Trust umbrella, meaning that the same rules generally apply), a Supplement (which will be Fund specific) and a Key Investor Information Document. This documentation will provide full information on the Fund, including the objectives, risks and fees that apply. Investors are reminded to ensure that they read and fully understand these documents prior to making a decision to invest.

Investors must read and fully understand these documents prior to making a decision to invest.

 

How does it work?


Each time an investor invests in a Fund they are issued with “units”. These units represent the investor’s share in the Fund. The price of the units, more generally referred to as the NAV (i.e. net asset value) is calculated based on the price of the underlying investments held in the Fund. As the value of the underlying investments increase (or decrease), so too will the NAV increase (or decrease) to reflect this. The NAV is the value of each of these units at any point in time and is calculated as follows:

 

Market Value of Fund Assets
(Market value of its equities and bonds along with value of any dividends/coupons paid etc.)

€10,100,000

minus Funds Liabilities
(fees and expenses)

€100,000

 

€10,000,000

divided by Number of shares outstanding

100,000

Equals  NAV

100

 

The Fund documentation will set out the pricing frequency of each Fund, which is generally daily or weekly, although some Funds may price monthly or less frequently.

When investors subscribe to acquire units in a fund, the number of units they receive will be based on the amount they have to invest and the unit price, much like equities. Where fund investment is different in this regard is that the fund can issue new units when an investor is subscribing or redeem existing units when an investor is selling. This means the number of units in issue can change on an ongoing basis.

 

Types of Funds


There are many categories of Funds; however, most Funds fall into one of the following categories:


  •     Money Market Funds
  •     Bond Funds (also called fixed income Funds)
  •     Equity Funds
  •     Alternative Funds


Each type of Fund has different features and different associated risks and rewards. Generally, as with most investments, the higher the potential return, the higher the risk of loss.

 

Money Market Funds


Money market Funds generally aim to protect capital and try to maintain a stable NAV. However, money market Funds are not capital protected and the NAV may fall if the Fund's investments perform poorly.


Money market Funds usually pay dividends that generally reflect short-term interest rates, and historically the returns for money market Funds have been lower than for either bond or equity Funds. Money market Funds are considered to be relatively low risk compared to other types of Funds, however risks still apply. The risks that may apply when investing in funds are outlined in more detail below.

 

Bond Funds


Bond Funds have the ability to invest in a wide range of fixed income securities. Bonds are a debt security, issued by a corporation, government, governmental agency or even a supranational organisation such as the European Investment Bank. (Learn more about bonds). Bonds Funds typically have two sources of return, interest and capital appreciation, but like all investments that hold assets in other currencies, they may also benefit from currency movements. Conversely, currency movements may not be favourable and can reduce returns.


Bond Funds are assumed to have a higher degree of risk than money market Funds given the greater investment flexibility that they have.

 

Equity Funds


Equity Funds generally invest in equities, taking direct shares in different companies. Equity Funds are considered to be riskier than both money market and bond Funds. Although an equity Fund's value may be more volatile in the short term, historically stocks have performed better over the longer term than other asset classes, including both corporate and government bonds.

 

Alternative Funds


The Alternative Funds' space covers a broad range of more niche investments including, but not limited to:


  •     Commodities Funds
  •     Absolute Return Funds
  •     Multi-Asset Funds
  •     Hedge Funds


These types of Funds are considered to be riskier than both money market and bond Funds. Depending on the Fund, it may display a similar or higher level of risk to equity Funds.

Other Funds


Some Funds focus exclusively on investments in particular geographic areas. Others focus on sectors, while others still will combine a range of asset classes, sectors and geographies. This strategy can help to diversify risk. Alternatively, investors may wish to achieve similar means, by choosing their own combination of Funds in the proportions that best suit their own objectives and risk profile.  

 

Fees


Investment Funds charge a range of fees within the Fund, including but not limited to, investment management fees, trustee fees, administration fees, legal fees, etc. You should read the relevant Fund Prospectus for further information.

 

Risks of investing in Funds


Investing in Funds is not without risk. There is a risk that after you have invested in a Fund the value of its underlying investments may fall overall. If that occurs the Fund’s unit price will also fall to reflect the lower value of the underlying investments. If you were to sell (redeem) your investment in that Fund at that time you may incur a loss i.e. you may receive back less than you initially invested.


There are many factors which may impact on the performance of a Fund.


Learn more about the risks of investing in Funds.


Funds available from Davy Select

 

Davy Select offers investors the opportunity to invest in over 700 third party investment Funds, covering a wide variety of asset classes.