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Understanding investment funds is the first step to diversifying your capital and investing intelligently. An investment fund is a collective investment instrument. Imagine a group of investors pooling their money together to access opportunities that would be difficult or very costly to reach individually.

This common pool of assets is managed by professionals (management company), who invest the capital in different assets such as stocks, bonds, or real estate in order to seek the highest possible return according to the fund's risk profile and investment policy.

Investing in funds involves various risks, depending on the fund's investment approach, the assets it invests in… the level of risk will vary accordingly.

Although today it is possible to subscribe to them digitally through entities such as ABANCA, the origin of the first investment fund dates back to 1774 in the Netherlands. After a financial crisis, a Dutch merchant named Abraham van Ketwich created the first fund in history under the name Eendragt Maakt Magt to offer diversification to small investors.

Since then, they have evolved to become the tool for channeling the savings of the modern economy into investments, allowing anyone to access global markets.

Investing in a fund involves three clear objectives:

• Automatic diversification: Generally, when you invest in a fund, your money is spread across different assets, reducing the impact if a particular asset or sector suffers losses.

• Professional management: A team of experts analyzes the market for you, making buy and sell decisions based on technical analysis that is difficult for an individual investor to access.

• Access to global markets: It allows you to take positions in large companies, international public debt, or emerging markets with a minimum investment (the amount will depend on each fund's policy).

Example: If you want to invest for the long term, for example for retirement, an investment fund allows you to make regular contributions to accumulate capital. However, you should keep in mind that funds are subject to market fluctuations, so there is a risk of incurring losses and not recovering the amount initially invested.

In Spain, investment funds are strictly regulated by the CNMV (National Securities Market Commission).

• Transparency: The management company is required to publish an information prospectus and a Key Information Document (KID) so that you know exactly the fund's investment objective, the risks associated with investing in it, the costs and expenses, as well as scenario calculations under different circumstances, among other things.

• Segregation: Your money does not belong to the bank's balance sheet. If the bank were to have problems, the fund would still belong to the investors.

If you want to speak like an expert, keep these definitions on your radar:

Not all investment funds are the same, nor do they pursue the same objectives. To classify them, three main criteria are usually used: the type of asset they invest in, their management style, and their level of risk.

According to the type of asset or where the money is invested

This is the most common classification and determines the expected behavior of your investment:

1. Fixed Income Funds

They invest in debt securities (bills, bonds, debentures) issued by governments or companies.

2. Equity Funds

They invest most of their assets (more than 75%) in shares of publicly traded companies.

3. Mixed Funds

They combine fixed income and equities in different proportions. In this group, you can find mixed fixed income funds, which invest a maximum of 30% in equities, or mixed equity funds, which invest between 30% and 75% in equities.

4. Money Market Funds

They invest in very short-term fixed income assets with high liquidity. The average duration of their portfolio is equal to or less than six months, and they can only invest in assets of high credit quality. Short-term money market funds are characterized by an average portfolio duration of 60 days or less.

5. Global Funds

These are funds whose policy does not fit into any of the previous categories.

5. Real Estate and Alternative Investment Funds

• Real Estate: Invest in the purchase and rental of real estate assets.

• Alternative (Hedge Funds or Private Equity): Use complex strategies or invest in companies that are not publicly traded. These are more sophisticated products aimed at experienced investors.

Both types of funds are also characterized by their lack of liquidity. We also find funds that are totally or partially guaranteed, with target returns… All funds can in turn be euro-denominated or international, depending on whether they invest in foreign currencies.

All investments involve risks, and transparency is the foundation of trust. The main risk factors that may affect your fund are:

• Market risk: This is the natural fluctuation of prices. The value of investments can fluctuate due to the general economic situation, interest rates, or political events.

• Credit risk: The possibility that the issuer of a fixed-income security (a government or a company) experiences financial problems and is unable to pay the interest or return the invested capital.

• Currency risk: If the fund invests in assets denominated in a currency other than the euro (such as dollars, yen, or pounds), fluctuations in exchange rates can either benefit or harm your final return.

• Liquidity risk: The risk that the fund may have difficulty selling certain assets in its portfolio quickly at a fair price, something that usually happens during times of financial panic or in very secondary markets.

Remember: Your risk tolerance and your time horizon (how long you can leave your money untouched) should guide your choice.

How much does it cost to have a fund?

Transparency is total. Most costs are deducted directly from the fund's Net Asset Value:

• Management and deposit fee: These are the recurring annual costs for the administration and custody of the assets. They are the most important fees, as they compensate the management team and the depositary entity. In addition, funds have other costs such as those related to transactions, which also affect the fund's profitability.

• Subscription and redemption: These are costs associated with the purchase (entry) or sale (exit) of shares. Not all ABANCA funds apply a subscription and redemption fee. It is necessary to check the specific conditions of each fund to know if this cost exists.

• The impact of costs: A 1% difference in fees may seem small, but after 20 years, it can mean a difference of thousands of euros in your final capital due to the effect of compound interest.

The great advantage: The "Tax Window"

In Spain, investment funds enjoy a unique and exclusive tax advantage that stocks, ETFs, and traditional deposits do not have: transfer exemption. It is important to note that this tax deferral only applies to resident individuals and that taxation may vary depending on the taxpayer's personal circumstances.