How do investment funds work?

An investment fund pools together the capital from a large number of investors with a view to making investments in certain financial assets.

To understand how investment funds work, you must understand the players involved:

  • Investors (stakeholders or unitholders): a natural person or legal entity that invests in an investment fund.
  • Management company: makes the investment decisions and uses the capital from investors to buy different financial assets that make up the fund's portfolio.
  • Depository institution: ensures the custody of the fund's assets and capital and controls the management company's activity to the benefit of investors.
  • National Securities Market Commission (CNMV): oversees and inspects the Spanish stock markets and the operations of investors therein. Funds are regulated by rules setting the limits on how management companies may invest the capital, with the aim of ensuring minimum diversification, liquidity and transparency.

How investment funds really work so that you can invest in them

To invest in an investment fund, savers buy interests in the fund. Except for some funds with minimum investment thresholds, investors can buy and sell interests in a fund at any time.

Buying interests is called subscription and selling them is called redemption. Every investor owns a part of the fund's capital (a certain number of shares or units), proportional to their investment.

An investment fund's value may rise or drop depending on the number of subscriptions or redemptions and how its portfolio assets perform in the market. This increase (or reduction) is allocated proportionally to the investors on the basis of the interests they hold.

The net asset value is the price of each piece of interest at any given moment. It is calculated daily by dividing the fund's total assets (including new investments, changes in the value of financial assets, minus redemptions and management and deposit fees) by the number of outstanding interests:

Fund's capital

Net asset value =   --------------------------------------

Number of outstanding interests

A fund's capital may go up or down for two reasons: investors join or leave the fund, or there are changes in the market value of the portfolio's assets. The change in the value of the portfolio's financial assets will determine whether the investment fund's return is positive or negative.

The return of an investment fund is calculated as the percentage of change in the net asset value between the subscription and the redemption dates; it may be positive or negative.

Investment funds trade through switches between funds, when you redeem your interests in a fund and immediately subscribe a different fund.

If you would like to find out more about the types of investment funds, see our website.


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