Find out when it’s worth investing in investment funds – 04/23/2023 – From Grain to Grain

Loved by many and hated by many, investing in investment funds is not a consensus. However, many of the reviews just show a lack of knowledge about the product. I explain some of the criticisms and when it is worth investing in investment funds.

Before explaining when to invest in funds, I would like to break some myths and misperceptions about investment funds.

Countless times, I’ve seen people who claim to be knowledgeable utter sentences like these:
1 – I don’t like to invest in funds or stocks, I only invest in ETFs;
2 – When the management fee is subtracted from the return of the fund, there is nothing left;
3 – I prefer bonds to funds, as bonds are safer and cannot be lost.

Many do not know that an ETF is just a fund. ETF is the acronym for Exchange Traded Fund, in English, Exchange Traded Fund. Therefore, it is nothing more than a fund that has specific characteristics of its category. I will talk about this type of fund in a future article.

The second case is also a very common fault and because it is repeated many times it ends up sticking in people’s minds. All return on funds shown is already net of all fees involved, except income tax. Therefore, the profitability that you observe in the presentation slides are already the returns that investors earn.

Finally, the third and most common, but not the last lack of knowledge is related to the nature of a fund. A fund is nothing more than a basket of assets. Therefore, everything that happens to the securities inside the basket is reflected in the funds. Therefore, the fault for the return is not the fund, but the securities in the portfolio.

Two confusions occur for investors to have the wrong perception about funds and pointed out in this third case. I explain these two below.

Funds are marked to market, while many securities are marked by the rate of acquisition in client portfolios. Mark-to-market gives a perception of greater risk due to the greater volatility of market prices and this is reflected in the funds.

Also, investors are often more conservative when choosing bonds and more aggressive when choosing funds. Therefore, the impression is left that the funds are riskier, but the problem was in the origin of the choice. Therefore, the comparison does not make sense.

Therefore, mutual funds are not an asset, but a vehicle for achieving desired exposure. For example, to have exposure to equities, fixed income, real estate and others.

Understanding at least these three myths, let’s get to the point at hand. You should invest in mutual funds when you want to take advantage of one or more of these four characteristics:
1 – Liquidity;
2 – Products with high initial value for application or not available at retail;
3 – Diversification;
4 – Specialization.

Because it is a basket of assets and with several clients, the manager is able to better manage liquidity.

In funds, it is also possible to access assets that are not issued to retail investors or whose minimum investment is very high. For example, issues of fixed income to professional investors or public offerings with restricted efforts.

Through investment in funds, the investor manages with small values ​​to have the possibility of diversifying in a significant amount of assets. If you were to do this directly in the same proportions, you would need thousands of Reais.

Finally, in a fund, the investor has a specialized team to select and monitor investments.

For these characteristics there is a cost. The cost can be seen as the condominium fee in apartment buildings. The residents of a building must pay a cost that is shared by everyone. The same goes for an investment fund.

As with condominiums, sometimes this cost in funds, too, can be higher than the promised benefits. In these cases, just look for another one that has consistent costs.

The great failure of investors and which often ends up generating frustration is the poor choice of funds. In a future article, I will discuss the process of choosing investment funds.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan
Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence
Chapter 8 Before making any investment, define these two factors
Chapter 9 For your investments to beat the CDI, you need to make two choices; understand
Fixed Income
Chapter 10 You should not build an income portfolio if you want to reach equity to live on income
Chapter 11 Avoid these two common fixed income investor mistakes
Chapter 12 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 13 Discover how to win the private fixed income premium, but with low risk
Chapter 14 This is the simplest way to plan your financial independence with fixed income
Chapter 15 With our interest rates, find out if it pays to invest in dollars
Variable income
Chapter 16 Taking a risk can accelerate your journey to financial independence
Chapter 17 What is multimarket funds and how did they come about?
Chapter 18 Understand how to select hedge funds
Chapter 19 Is Real Estate an Appropriate Investment for Achieving Financial Independence?
Chapter 20 Real estate funds are better investments than real estate, but most prefer the worst; understand
Chapter 21 These real estate funds are more like fixed income funds
Chapter 22 When selecting Real Estate Funds, be careful with this indicator
Chapter 23 Discover the five indicators that you cannot disregard in paper real estate funds
…
Chapter 26 Actions
Chapter 27 Alternative Investments
Chapter 28 When Should I Trade a Risky Investment That Is Not Performing?
Investment funds and Private Pension
Chapter 29 Find out when it pays to invest in mutual funds
Chapter 30 Understand the five steps to select investment funds
…
Chapter 33 Multimarket funds disappoint in the semester; what to do?

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