Luxembourg is the leading investment fund centre in Europe. Investment funds in the Grand-Duchy cover all key categories, currencies, regions and sectors. They can be an opportunity to make your financial resources grow faster in a time when interest rates on saving accounts are very low. But how do they work?
An investment fund is basically a company whose sole mission is to invest and manage your capital as best as possible, within the rules that are set beforehand. When you invest in a fund, you actually become a shareholder of the investment company: you own part of its capital. The fund will follow its mission: invest your capital as best as possible. In order to do that, the fund has hired a fund manager, who is a professional specialised in picking the right investments at the right time.
Funds can also be set up as an FCP (Fonds Commun de Placement), which is not a company but works exactly the same way, except for the fact that the governance is not that of a usual company.
You will be able to invest 2 broad categories of funds: passively managed funds and actively managed funds.
Passively managed funds have a pre-set investment rule, which they must follow whatever the market conditions. Usually, they aim to track the performance of a particular market, region or sector. The typical case of the passive fund is the index tracker: a fund whose mission is to replicate the performance of an index as closely as possible, be it up or down.
Actively managed funds have an investment policy that offers some degree of leeway to the fund manager. Basically, they aim to outperform their reference market or benchmark. They monitor the economic environment and adjust the assets of their funds accordingly. They buy and sell in large quantities in order to maximise capital gains.
Hedge funds are a special type of active funds which use complex strategies, instruments and investment techniques to seek performance. They can be extremely risky. The complexity of their investment process means that they need to be set-up using looser regulations, and therefore are usually reserved to specialised investors. You should definitely know what you are doing before trying to invest in a hedge fund.
Just like any financial product, investment funds have advantages and disadvantages. Their main advantage is that they give you access to a diversified portfolio in one “package”, even when you have very little money to invest, give you access to investments that would not be possible otherwise, and relieve you of the monitoring and management for the investments they cover. Active funds have the added advantage of being managed professionally. Experienced professionals work full time on your behalf to manage a portfolio of securities. Lastly, it is very easy to buy and sell your fund units via your usual bank or an online broker.
On the flip side, you have no control over investment funds: you choose the type of fund you buy, but, beyond that, you cannot influence individual purchases and sales within the portfolio, and you often don’t know the exact composition of the fund at any given moment. When you buy or sell your units, you do not find out their value at the moment of purchase and sale until up to a few days later because the fund value is calculated and published once a day, at most.
Regular investment plans, where you automatically invest the same amount every month, may be an interesting option. Designed for novices and experienced investors alike, these solutions enable you to invest a small sum of money on a regular basis into one or several funds according to your investor profile which will have been determined beforehand. Depending on the bank, there may be no entry, exit or custody fees.
You choose the amount to be invested and the frequency of your instalments. You can suspend or modify your payments at any time and if you want to withdraw your money, it will be available within a few working days.
Thanks to this flexible formula, your investments are spread over time, and as you invest the same amount of money, you buy more shares when they are cheaper (markets are low) and less when they are expensive (markets are high).
Whatever your choice is, don’t take any decision without having beforehand examined the question from all sides and got the maximum of information from your bank advisor.
Investing is a good way to supplement your savings and attempt to make it grow, provided you’re well prepared for it. Here are the five fundamental questions you need to answer beforehand.
"The Personal Banker is a customer's key contact. He/she has a thorough knowledge of the client's situation and goals. Therefore, he/she is able to guide them towards the solutions best suited to their needs." According to Rafik Khendek, Lead Personal Bankers, and Elise Jacobs, Personal Banker at ING Luxembourg.
The answer is simple: no, not at all. Choosing between advisory and discretionary management offered by the banks is far from being a headache. It will depend on you, your financial knowledge and the time you are willing to devote to making your investment portfolio grow. To make things clearer, let's start from the beginning and review the main advantages of both.