For the saver, the risk in investment funds or companies is also important. It is derived mainly from the fluctuations that occur in the net asset value, due to the variations in the market values of the financial assets that make up the fund’s portfolio. A fund will have greater risk the greater these fluctuations are (regardless of whether the fund has made a profit or loss in a given period).
In general, a higher level of risk is taken for equity securities than for fixed income and for the latter higher than for monetary instruments, which are considered practically risk-free. However, this does not mean that fixed income, especially long-term bonds, suffer large fluctuations in value in times of financial turmoil, when interest rates or risk premiums fluctuate considerably.
Within equity securities, assets not denominated in the national currency would have a higher risk (because, to the risk of equity securities, the exchange rate risk of the corresponding currency is added) and, among these, equity securities of emerging countries. In addition, small caps are more risky than larger caps. Sector funds (which invest mostly in a single specific sector of the economy) are also more risky than those that include securities from multiple sectors.
There are different measures of the risk of a fund, although the most used is known as “volatility” or annualized standard deviation, which is the annualized average of the daily changes in the net asset value in a given period with respect to the average of such net asset value in that period. Volatility is expressed as a percentage. Greater volatility implies greater risk, since it indicates the existence of values that are very distant (above or below) the average net asset value of the fund.
In order to reduce the risk of investment funds, guaranteed funds have become popular in some markets. These are funds that have the guarantee (total or partial) of a third party financial institution, which comes into play in the event that the net asset value of the fund, at the time of the expiration of the guarantee, is less than the stipulated value in the guarantee letter or clause itself. Guaranteed funds can be of two types:
- Debt guaranteed fund: They usually guarantee a certain performance for a predetermined period of time (the net asset value is usually fixed at the end of the guarantee period).
- Guaranteed at maturity (also known as equity guaranteed fund): They usually guarantee the capital invested plus an additional yield that is made dependent on an index, a share or any other variable of a financial nature.
On the other hand, the usual characteristics of these investment funds can be summarized as follows:
- There is an initial marketing period for the fund, during which the purchase of units does not carry a sales charge.
- In most cases, the guarantee can only be exercised when it expires, so that if you want to redeem fully or partially the units in the fund before the expiration of the guarantee, neither the minimum return nor the invested capital are usually guaranteed, depending exclusively on the market value of the fund’s assets at that precise moment. Furthermore, redemption before the guarantee expires will, as a general rule, accrue a redemption charge.
- In some guaranteed funds, “liquidity windows” are contemplated, that is, predetermined times when funds are allowed to be redeemed without paying a redemption charge, as long as the notice periods established for such purposes in the prospectus are respected. In these cases, the redemption net asset value will be that corresponding to the net asset value of the fund at the time it is requested, with no guarantee of performance.
- Some funds offer “regular payments” during the guaranteed period. These payments are designed as partial and mandatory redemptions, with all the ensuing tax consequences.
- At the expiration of the guarantee there are two options:
- The management company offers a new guarantee.
- A new guarantee is not offered and therefore the fund no longer enjoys the “guaranteed” feature.
- On the other hand, there are two types of guarantee, which are:
- the internal guarantee (in which the recipient is the investment fund itself) and through which a guarantor financial institution undertakes to pay to the fund, on the expiration date of the guarantee, the amount necessary for its net asset value equals the guaranteed net asset value.
- the external guarantee (in which the recipient is the unitholder): In this case, the unitholder himself is the one who receives the amounts as a guarantee from the financial institution, through a letter of guarantee (the unitholder will receive in their account, at the settlement date, the difference, if any, between the fund’s net asset value on the guarantee maturity date and the guaranteed net asset value).
