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These days, the world of investment funds is remarkably diverse, opening up great potential for specialization. There are now suitable investment funds for virtually every investor segment and for every conceivable investment requirement. There are currently about 7,500 different funds authorized for distribution in Switzerland, offered by more than 450 Swiss and foreign fund providers.
These days, there are funds for every investor segment, covering every investment objective and requirement. In recent years, the Swiss supervisory authority FINMA has authorized thousands of Swiss and foreign-law funds and approved them for public distribution. The total is now well above {0}. In addition to these, there are thousands more investment funds and fund-like collective investment schemes from Swiss and foreign providers that have not been approved for distribution and are solely offered as private placements within the framework of asset management agreements, primarily with affluent private clients.
Not all funds are exposed to the same level of risk. A distinction has to be drawn between higher-risk and lower-risk funds. This depends on their investment focus (i.e. what the fund can invest in) and investment objective (i.e. what return it seeks to achieve). Generally speaking, the larger the weighting of equity and foreign currency investments in a fund, the more risk is entailed and the greater the volatility to be expected. Experience shows that funds with relatively high risk are USD-denominated emerging market funds, as well as hedge funds and private equity funds. Examples of funds that tend to have lower risk exposure are money market funds in CHF and real estate funds.
There are a number of different criteria that can be used to describe funds and to distinguish them from each other. Such criteria include the way the fund works and to what purpose, its investment focus, and its investment return. As regards investment focus, and in particular the investment instruments used, we can start by distinguishing between five main categories of investment fund: equity funds, bond funds, money market funds, asset allocation funds, and real estate funds. Swiss Fund Data publishes the market shares of the five categories (see box).
Actual market share of the fund categories in % and in CHF billions:
As a rule, investors want to hold certain liquidity reserves or want to -unknown-park-unknown- their capital in a safe haven in periods of uncertainty. However, the money should also be available at any time. Investments in money market funds are suitable for these needs. Money market securities are debt instruments with terms to maturity of up to twelve months. Thanks to these short terms to maturity, they entail virtually no interest-rate risk.
Bond funds offer attractive investment opportunities in the fixed-income segment. In particular, they can provide a platform for investors focused on income and returns given that they regularly pay (interest) income. Bond funds invest in corporate bonds or bonds issued by public bodies, which are as a rule subject to lower price fluctuations than investments in equities.
Equity funds allow investors to invest efficiently in one of the most important asset classes. You buy an indirect stake in companies, and thus participate in their performance and also the corresponding risks and opportunities. Over the longer term, equity investments offer the greatest earnings potential by comparison with other financial investments. Well diversified equity investments therefore belong in all portfolios that are focused on capital growth. However, the price for this higher performance potential over the longer term is higher risks. Risk in this context refers to the extent of the price fluctuations (volatility).
Asset allocation funds are also known as strategy funds or portfolio funds. They are mixed asset funds, in other words they can invest in all traditional investment securities, such as money market instruments, bonds and equities.
By buying real estate for investment purposes, investors can benefit from rental income that is relatively stable and largely independent of the developments on the financial markets. The fund management companies of real estate funds take care of the acquisition and administration of investment properties, something that requires profound specialist expertise and knowledge of the real estate market, not to mention large sums of money, which individual investors often don-unknown-t have.
Each of these five fund categories can be divided further into any number of sub-categories on the basis of the investment focus, investment style, investment objective, domicile, legal structure, the investor group targeted and many other additional criteria.