Investing in funds step by step, or everything you need to know about them

It sounds simple. Instead of investing yourself in individual stocks, bonds, real estate and so on, you choose a "package" that a team of professionals has put together for you. You put your own money into it, and when the fund does well, your deposit appreciates and you earn. Could there be a catch? And how do you choose the right investment fund? Read on.

What is an investment fund (also known as a fund of investments)?

An investment fund is defined as a collective investment instrument that pools funds from multiple investors and invests them into various types of assets – from stocks and bonds to real estate. It is a way to efficiently grow money without having to handle everything yourself. Fund managers take care of where, how much and when to invest.

In the Czech Republic it is governed by Act No. 240/2013 Coll., on investment companies and investment funds.

Investment fund vs. mutual fund: Is it the same thing?

Although these two types of funds are similar and are often confused, it is not the same thing. A mutual fund is just one of the types of investment fund and, unlike an investment fund, it has no legal personality.

Mutual fund

• What is it? A specific type of investment fund where the investor buys unit certificates that represent their share of the fund's assets. It is a legal arrangement, has no legal personality and is merely an instrument that is used for investment operations.
• Ownership: Investors do not own individual assets (e.g. stocks or bonds), but a share in the fund as a whole.
• Structure: An open-end mutual fund (the most common) allows an unlimited number of investors and the ability to buy or sell unit certificates at any time.
• Regulation: Strictly regulated by law (in the Czech Republic under the Act on investment companies and funds).
• Examples: Bond, equity, mixed or money market funds.

Investment fund

• What is it? A broader term encompassing various types of funds, including mutual funds. Investment funds manage investors' assets and invest them according to a chosen strategy. It is an institution and a legal entity with legal personality.
• Structure: It can be a mutual fund, a joint-stock company, a trust, or another legal form.
• Types:
  • Mutual funds
  • Closed-end funds (investments have a fixed duration and number of shares)
  • Hedge funds (riskier investment strategy for qualified investors)
  • Real estate funds
• Target group: Some funds are aimed at retail investors (mutual funds), others at large or qualified investors (e.g. hedge funds).
• Has legal personality

Open-end fund vs. closed-end fund

• Open-end funds: They issue unit certificates according to investor demand. You can therefore request the redemption of unit certificates at any time (= they are very liquid), and they are ideal for those who are looking more for flexibility.
• Closed-end funds: They have a fixed number of unit certificates that are traded on the stock exchange. The price of these units often fluctuates depending on supply and demand, which is less flexible than with open-end funds.

Whether it is an open-end or a closed-end fund, it is always a passive investment where you have no control over individual investment decisions.

Examples of well-known investment funds are the Vanguard 500 Index Fund or the historically first open-end fund, the Massachusetts Investors Trust Fund. You can find an overview of all investment funds in the CNB database.

Types of investment funds and their risk profiles

Investment funds can be divided according to the type of asset and investment strategy:

1. Equity funds: They invest in stocks and have higher risk as well as potential return. A typical example is funds focused on growth stocks (technology) or dividend stocks.
2. Bond funds: They focus on bonds issued by states, corporations or other institutions. They offer more stable, but lower returns.
3. Mixed funds: They combine investments in stocks, bonds and other assets and are suitable for investors who want a balanced ratio between risk and returns.
4. Index funds and ETFs: Passively managed funds tracking a specific index (e.g. S&P 500). They are most often chosen by investors looking for low fees and a diversified portfolio with market returns.
5. Real estate funds: Funds investing in real estate (residential, commercial) or companies connected with real estate. Suitable for those who want regular income and protection against inflation. High risk: Great potential for returns, but also high losses.
6. Hedge funds: Special funds using aggressive strategies. They are typically used by experienced investors with a high tolerance for risk.
7. Alternative investment funds: They invest in specific assets such as commodities, derivatives, startups, private equity or cryptocurrencies, also often with higher risk.

Each type of fund has a different risk profile, which is why it is important to choose a fund that matches your investment goals.

Advantages of investment funds

• Portfolio diversification: Thanks to investment funds, you can invest in a wide range of assets – stocks, bonds, real estate and more – which reduces the risk of loss. In addition, they can give you access to investments in assets that you would reach with difficulty on your own.
• Higher liquidity (with open-end funds): Whenever you need to, you can sell your unit certificates at their current value.
• Professional management: Funds are managed by experienced professionals who understand the current market, actively monitor it and regularly optimise the investment strategy.
• The option to start with little capital and to invest regularly: Unlike individual investing, you do not need high entry amounts. Even with a small investment, which you can repeat at will, you gain a share in a broader portfolio.
• Tax advantages: In the Czech Republic (and some other countries), profits from mutual funds may, after a certain holding period, be exempt from income tax.
  TIP: Verify, however, under what conditions profits from funds may be taxed.
• Saving time: You do not have to devote yourself to market analyses or the selection of individual assets. The fund handles the management. The only thing you have to do is choose the right investment fund – we will get to that shortly.

Disadvantages of investment funds

• Management fees: The work of fund managers costs something, which is also why investment funds are associated with certain fees (entry, exit, management). You pay these even when the fund's performance is worse.
• Limited control: You as investors have no direct influence on the managers' decisions. Your investment depends on the fund's strategy. Nor do you have any guarantee that the fund's managers will not prioritise their own interests over the interests of investors.
• The impossibility of accurately predicting returns: Even professional management is no guarantee that the fund will achieve the expected ROI. Past returns are no guarantee of future results.
• Average returns: Actively managed funds often lag behind market indices, while having higher fees. Index funds (ETFs) mitigate this problem, but do not solve it completely.

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You have a direct influence on your investment and transparency ranks among the top of our values. You yourself choose how much, how often and into which property (which properties) you invest. Take a look at our current investment offer – and notice the detailed descriptions that will interest you as an investor!

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How to choose the right fund for your investment goals: A step-by-step procedure

1. Assess your current financial situation
Before setting goals, get clear on how much you can invest. Take into account your income, expenses and debts, and create a financial reserve for unexpected situations.

2. Set specific goals
Clearly define what you want to achieve through investing. For example:

• Buying a property
• Financing children's education
• Building wealth
• Saving for retirement

3. Divide your goals according to priorities
Determine which goals are most important to you. Short-term goals (1–3 years) may include saving for a holiday, medium-term goals (3–10 years) buying a car or an apartment, and long-term goals (10+ years) building wealth or providing for old age.

4. Consider your investment horizon
The time horizon significantly influences the choice of investment strategy. A longer horizon allows you to take on higher risk with the potential for larger returns. Conversely, for short-term goals it is better to choose a conservative approach to avoid losses.

5. Determine your risk tolerance
Find out what risk you are willing to take on. If market declines stress you out, consider less risky investments.

Based on the types of funds listed above, we have categorised investment funds for you according to their risk profiles:

• Low risk: Government bond funds.
• Medium risk: Mixed funds, real estate funds.
• High risk: Equity funds, hedge funds, alternative funds.

6. Review your goals regularly
Investment goals and time horizons can change along with your life priorities. Reassess them regularly, therefore, and adapt your strategy to your current needs.

7. Create an action plan and stick to it
Once you have defined your goals, time horizon and strategy, follow your plan and do not give in to emotions during short-term fluctuations on the markets.

Then you "just" open an investment account, choose the right fund and regularly evaluate the performance of your portfolio. While doing so, avoid:

• Misunderstanding fees: Make sure you understand all the costs associated with the fund.
• Ignoring risk: Consider possible scenarios, including a market decline.
• Insufficient diversification: Do not put all your funds on one card.
• Giving in to emotions: See point 7 just above.

You most often ask

Which type of investment fund generally fluctuates the most?

Equity funds, because they depend on the performance of the stock market.

How much does it cost to set up an investment fund?

Setting up a fund requires higher capital and meeting legislative requirements; the costs differ depending on the type of fund.

Where to invest a million crowns?

Read our detailed article How and what to invest money in?, where we have also analysed specific investment strategies.

What is the role of an investment fund?

Spreading risk and enabling access to a wide range of investment opportunities.

How do you withdraw money from an investment fund?

With open-end funds you request the redemption of unit certificates; with closed-end funds it is necessary to sell the unit certificates on the market.

TIP: Take a look at the answers to other frequently asked questions.

Conclusion and next steps

Investing in funds offers another opportunity to grow your finances. What is important, however, is to select funds on the basis of informed decisions and to regularly reassess your portfolio. If you want to get started, set your goals and weigh the risks. Or explore micro-investments in real estate with InvestBay!