Mutual Funds

GENERAL INFORMATION

Mutual funds are instruments of collective investments. The fundamental principle is that multiple investors vest their funds with a professional manager (investment company) who manages and add value to the funds for a fee. In fact, it is a set of assets consisting of securities and money split onto individual shares. As part of investments in a mutual fund, you can buy a share certificate (hereinafter referred to as SC). It is a security expressing the share in the fund's assets, and the SC holder, i.e. the investor, is called the shareholder. Management of the mutual fund is carried out by the investment company operating the fund.

Investments in and functioning of mutual funds in the Czech Republic is governed by collection of Acts No. 240/2013 on investment companies and funds, and Act No. 256/2004 Coll., on the capital market business. The Czech National Bank supervises over compliance with the legislation and specific statutes. Any mutual fund intended to be distributed in the territory of the Czech Republic must hold a permit and registration from CNB.

BASIC TYPES OF MUTUAL FUNDS

First of all, we distinguish between open-end mutual funds and closed-end mutual funds.

A closed-end mutual fund has a limited number of SC and no obligation to redeem SC from shareholders; SC of a closed-end mutual funds are can only be traded in standard capital markets. The fund is managed for a certain time; after expiration of its term, one of these 2 situations occurs: either the closed-end fund is transferred to an open-end fund, or the shareholders are paid the current price of their shares, representing the investor's original deposit and betterment.

For an open-end mutual fund, issuing new SC is not limited by number. At request of a shareholder, an open-end mutual fund must redeem purchased SC. Share certificates of an open-end mutual fund can be traded in standard capital markets.

Money market funds

  • From the investment risk perspective, they are the safest, but also generate smallest returns
  • They invest in money market instruments, particularly short-term quality bonds, such as treasury bills, government bonds, bonds of the biggest banks, bonds of renowned issuers, short-term bond contracts and short-term deposits
  • They are advisable for short-term investment horizon (up to one year)
  • Suitable for very conservative investors

Bond funds

  • They bear greater risk than money market funds
  • Their investments consist of government-guaranteed bonds, bonds issued by central banks, and quality corporate or bank bonds
  • They may register short-term fluctuations of the investment value, however compensated by higher returns
  • They can also contain an equity part, which, however, must not exceed 10% of the fund's assets
  • This fund type is advisable for short- to mid-term investment horizon (3-5 years)
  • Suitable for conservative investors

Equity funds

  • Funds under management of equity funds are by vast majority allocated to stock markets
  • Stock are classified as risk-bearing assets, however with possible highest return
  • Thus, when opting for equity fund investments, the investor must consider the risk of fluctuating returns in the short- and mid-term investment horizon
  • However, in the long-term horizon (above 8 years), these investments are preferable, as their returns may reach up to dozens of %.
  • Given their structure of assets, these funds are intended for dynamic or aggressive investors accepting high levels of risk.

Mixed funds

  • They bear medium investment risk and corresponding allocation of the portfolio
  • The funds invest both in bonds and stocks. Generally, the higher the share of stocks in the fund's portfolio, the higher the risk and possible returns are
  • This fund type is intended for medium- to long-term investments in the horizon of 5-8 years
  • Suitable for more experienced investors accepting higher levels of risk

Funds of funds

  • The portfolio of a fund of funds primarily consists of share certificates or stocks of other mutual funds
  • The fund thus offers another level of allocation of risk; fluctuation of share certificate values approaches the level of more conservative equity funds
  • These funds often specialize in selected industries
  • Long-term investments are ideal for this fund type (5 and more years)
  • They are suitable for different types of investors depending on the particular funds in which the money is invested.

Guaranteed funds

  • These are specialized structured funds aiming at ensuring safe return of a fixed part of the investment (even 100%) while participating in the capital market
  • Guaranteed funds can be used to invest in indices reflecting development in the world's financial markets
  • The investment horizon is mostly fixed for individual funds (varying around 5 years)
  • Early instructions are charged for
  • Intended for conservative investors

FUND TYPES BY DISTRIBUTION OF YIELD

Yield (dividend) funds

These funds pay out the yield (dividends) in regular intervals. This form is particularly used by funds investing mainly in bank deposits and bonds.

Growth (reinvesting) funds

Returns are reinvested in the portfolio for the growth of the share certificate value. The yield is paid out to the shareholder after the investment ends in the form of redemption of the share certificate.

FUND TYPES BY MANAGEMENT

Funds with active management

In a fund under active management, the strategy is adjusted according to the market conditions. The fund manager seeks investment opportunities and adjusts the structure of the fund's assets. These funds are associated with higher management fees.

Funds with passive management

Funds under passive management pursue an opposite strategy. The strategy is predefined and built on the buy and hold model. There are minimum changes in the asset structure. These types of funds suffer from being less flexible upon big price drops.

Index funds

This fund type is focused on a certain benchmark, mainly a foreign index, trying to achieve similar results (for example Standard&Poor´s 500 Index, Standard&Poor´s MidCap 400 Index, Dow Jones Industrial Average)

BENEFITS OF INVESTING IN MUTUAL FUNDS

Wide range of investment strategies to choose from

Today, there are plenty of funds with different focuses, ranging from riskier equity funds, mixed, bond funds to money market funds. The investor can thus choose an investment that precisely matches his or her preference, risk profile and planned investment horizon.

The fund's money is managed by professional managers

The fund's manager takes care of choosing the particular investments and thus the investor does not have to monitor the market all the time. The money is managed by true financial professionals capable of maximizing the return and minimizing the risk associated with direct involvement in difficult financial markets.

Continuously added value

All financial market operations are reflected continuously in the share certificate value, including the possibility to reinvest collected returns over time. Current prices of share certificates are determined at least once a week, or even on a daily basis for some funds.

Optimized taxation

The investor can sell the SC anytime back to the fund manager for the current price. If the investor is a private individual and proceeds with the redemption more than 6 months after acquisition, the yield is exempt from tax.

High liquidity of the investment

SC owners may ask the manager for redemption anytime. In accordance with applicable legislation and fund statute, the fund manager is obliged to redeem the share certificates in the given time for the officially announced price paid cash to the investor.

Optional regular savings or annuity plan

Many open-end mutual funds allow regular savings of the investor by gradual "depositing" of certain financial amounts. Some open-end mutual funds also allow regular redemptions ensuring that the investor receives agreed cash amounts in regular intervals.

Detailed and available information about mutual funds

All important information about the portfolio's investment strategy and structure, current prices of share certificates and other information is regularly disclosed in various medial and printed publications. Accuracy of the information is reviewed independently by the market regulator and fund depository.

FEES ASSOCIATED WITH INVESTMENTS IN MUTUAL FUNDS

Entry fees

The fee covers the cost of purchase of and subscription for share certificates, broker fees and other initial costs.

Management fee

This is a current fee deducted by the manager every year from the fund's assets.

Exit fee

This fee is less common and mostly applies to guaranteed funds. It covers additional costs incurred by the manager in connection with the investor's early withdrawal.

Success fee

It allows the manager to participate in the capital yield and is defined as percentage of the yield.

Equity Desk:

Eva Polánová +420 234 401 803
Jakub Schermer +420 234 401 838
Jakub Veselský +420 234 401 819
Richard Skácel +420 234 401 827

TECHNICAL SUPPORT