Types of investment funds: what are the options?
If you know the differences between the various types of investment funds, it will be easier for you to weigh their individual advantages and risks and to decide which to invest in depending on your goals and your profile.
Investment funds can be classified on the basis of different criteria. One of these criteria is their investment strategy, i.e. the type of asset that the fund's capital is invested in and the risk assumed by the shareholder or unitholder:
Funds that invest in the monetary market, where cash and other assets are traded (e.g. credit transactions and loans, bills of trade and government debt), considered to be low risk and high liquidity. Portfolio terms are six months or less on average.
Primarily invested in fixed-income assets such as bonds, debentures, promissory notes and government bonds. The length of these funds depends on the investment's term. The performance of fixed-income funds is linked to changes in interest rates. Also, the shorter the assets' maturity term, the lesser the risk but also the potential return.
These funds invest most of their capital (at least 75%) in shares. The market offers a wide range of funds depending on the geographical area, sector and business capitalisation you invest in.
Equity funds are divided into subcategories depending on the market they invest in (Spain, eurozone, Unites States, etc.), the sectors (energy, telecommunications, technology, etc.) and other characteristics which determine the securities you invest in (e.g. stock market capitalisation and the company's size). Equity funds offer higher potential return than fixed-income funds, linked to greater risk.
Funds exposed to fixed-income assets as well as equity assets. The percentage of investment in each asset varies depending on the fund: in mixed fixed-income funds, investment in equity assets is less than 30%; in mixed equity funds, investment in equities is between 30% and 75%.
You should know this percentage since it will determine the risk associated with the fund and its potential return. When a mixed fund invests in fixed-income assets to a higher percentage, the potential for return is lower, but so is the risk. Conversely, the higher the investment in equities, the higher the potential for return but also the higher the risk assumed by investors.
Funds that allow you to invest in a wide range of assets with no predetermined percentages. This type of fund has no defined investment policy and it is not possible to class it under one of the categories above. They have the freedom not to set maximum percentages of investment in fixed-income assets or equities and to determine the geographic distribution of their investments. As a consequently, they are high risk.
Absolute return funds
Funds that set as their management goal, with no guarantees, to achieve certain return within a certain period, while keeping to a pre-set risk.
Fully or partially guaranteed funds: Funds that guarantee the recovery of 100% or less of the invested capital on maturity, respectively. These funds are further divided into guaranteed fixed-income funds and guaranteed equity funds.
Target date or passively managed funds
Funds that aim for a specific return target, with no guarantees, or to mimic a stock market index.
Irrespective of the type of investment fund, you must bear in mind that no investment in financial products is free from the risk of total or partial loss of your capital, depending on the fund's risk.
In addition to the above, there are other types of investment funds with non-standard trading due to their legal form, liquidity, type of assets that they invest in or their strategy. Some of the aspects of the regulations governing funds do not apply to them and, as a consequence, their associated risk is higher. These include ETFs (exchange-traded funds), hedge funds (free investment funds), funds of funds and real estate funds.
Find out more about the types of investment funds in our financial training videos or go to Spotify and listen to the episode on our podcast "Santander AM Aprendiendo a Invertir" about investment fund categories.
You can find more information about investment funds and their characteristics on our website.