I am starting to invest, what should I know?
A mutual fund is an investment tool that pools money from a number of investors to purchase a portfolio of stocks, bonds or other securities (according to the fund's stated strategy). Unitholders' property rights are represented by units. The unit-holders of the funds may be natural persons as well as institutional investors. Mutual funds may be distributed by public or private offer (public/private funds). Units of public funds can usually be bought and sold at any time. Mutual funds are managed by professional money managers (management companies) who invest the fund's assets and seek to provide capital gains or returns to the fund's investors. A mutual fund's portfolio is structured and maintained to meet the investment objectives set out in its Statute and Sales prospectus. Management companies provide small or individual investors with access to professionally managed portfolios of stocks, bonds and other securities.
Equity mutual funds invest mainly in shares/stocks. The holders of units in an equity fund thus participate directly in the assets and earnings of a large number of companies. The equity funds we offer include, for example, Fond maximalizovaných výnosov.
Bond funds (also called fixed-income funds) are investment funds that invest primarily in interest-bearing securities such as government and corporate bonds, mortgage-backed securities or debt securities of financial institutions. This category includes, for example, our Eurový dlhopisový fond.
Typically, mixed mutual funds may invest in equities, bonds and other investment funds, combining the potential return and risk characteristics of equity, debt and other investments.
Stocks/equities are an security that represents the rights of a shareholder to participate, according to the law and the articles of association of the company, in its management, profits and in the liquidation balance after the dissolution of the company with liquidation. Shares are mainly bought and sold on stock exchanges and are the basis of many investors' portfolios.
A bond is a debt security that carries with it the right of the holder to demand repayment of the invested amount and the payment of the proceeds at a specified date. The essence of a bond as a debt security is the granting of a loan by the bondholders to the issuer of the bonds and the obligation of the issuer to repay that loan and to pay an agreed interest return. In most cases, the bondholder receives periodic interest payments until the maturity of the bond, at which point the issuer pays the bondholder the invested amount, i.e. the value at which the bond is denominated, the 'face value'. Bond prices are inversely correlated with interest rates: when rates rise, bond prices fall, and vice versa.
The recommended (or minimum) holding period represents the minimum time horizon over which an investor should be prepared to hold an investment. This information is required by law to be disclosed in the key information document. Its value depends on the type of assets in the relevant fund and, in the case of debt investments, on their maturity, in each case assessed on a fund-by-fund basis.
Diversification is a fundamental principle of mutual fund management. A diversified portfolio contains a mix of different asset types and investment instruments. By deliberately spreading investments across different securities, issuers, markets, currencies, etc., risk is spread. Ideally, losses on one security are neutralised by gains generated by other securities.
A portfolio is defined as all securities held by a management company or person in a particular allocation in accordance with a particular investment strategy. A fund is also a portfolio and consists of a number of different assets (e.g., bonds, stocks, funds, real estate, etc.) that are selected by the fund manager in accordance with the fund's documents and strategy.
Volatility is a measure of the fluctuation in price value for a given security or market index. In the financial sector, it is used as a measure of the risk of an investment. It is calculated on the basis of historical deviations from the average monthly performance of the fund. The larger the deviations, the higher the volatility. Higher volatility is found, for example, in equities, whose price can sometimes change by as much as 5% in a single day. In contrast, we usually see lower volatility in bonds.
It expresses and measures the appreciation of an investment or portfolio over a period of time. In the case of investment funds, it is usually the change in net asset value (NAV) expressed as a percentage. Performance is therefore the change in the current price of a fund's holdings over a period of time.
Risk can be understood as the degree of uncertainty or indeterminacy that may result in a loss of value of an investment. There are several types of risk, e.g. risk of loss of asset value, interest rate risk or currency risk.
Dollar-Cost Averaging (DCA) or cost averaging is an investment strategy used by many investors. In DCA, an investor invests the same amount of money in a particular security or portfolio at regular intervals, regardless of its price. This strategy aims to reduce the impact of short-term fluctuations in the price of an asset and also to avoid an inappropriately timed one-off higher total investment at a potentially higher price.
Introduction
Investing has become very popular in recent years among ordinary people who are looking for ways to manage their money efficiently and where to save it so that it does not lose value due to inflation. As investing becomes more and more popular each year and more and more investors are coming forward, it is important that each investor chooses the right financial instrument to suit his or her requirements. For ordinary people, mutual funds are one of the most popular and suitable instruments. This is precisely because the money in them is looked after by management companies, with teams of experts and analysts with years of experience. Investors do not have to follow events and news on the financial markets that affect the value of their investments on a daily basis. Investors need to determine at the outset what they expect from an investment, how much risk they are willing to take and for how long they want to invest. In this guide, we will try to give you an overview of some of the principles that investors should follow when investing.
Objectives and budget
Turn your goals into investment plans that are clearly defined. Clear definition, measurability and realistic achievement can help investors avoid common investing mistakes. It is a good idea to fully understand your goals before turning them into investment plans. If your goal is to save half a million euros for retirement, your investment strategy will not be the same as if your goal was to save €35,000 for a new car, for example. Understanding your goals and investment timeline can help determine the amount of risk you are willing to take.
How much do I need/ How much do I need to put aside
It's also important to understand whether you want to invest on a one-off basis, on a regular basis, or a combination of both. For regular investing, you should evaluate how much you can put aside and invest on a monthly basis. From your salary or other regular income, you should determine the amount of money you need for essential expenses (e.g. food, personal items, rent, mortgage or childcare) and for non-essential expenses (e.g. holidays, leisure activities). You should have money safely stored and readily available (called a reserve) in case of an unexpected situation such as job loss. The amount should be between 3 and 6 times the monthly income. If you have built up such a reserve, then this is a good time to set aside an amount from your income to invest. How much a person can set aside per month to invest is very individual. That is why the best advice is- put aside and invest as much as you can.
Know your own reactions
It is also important that you know your risk tolerance and choose appropriate mutual funds accordingly. There are mutual funds with lower risk, but there are also mutual funds with higher risk. If you choose the right mutual fund for you, you will react appropriately to unexpected events and it will be easier to stick to your investment plans. Risk and potential return are generally linked in that the desire for greater returns will require greater exposure to market risk. The riskier the investments you choose, the more volatile they can be (their value can change significantly). Your tolerance for risk is one of the most important factors that will influence the selection of mutual funds and assets for your portfolio. One way to assess your risk tolerance is to complete an investment questionnaire (at the point of sale or electronically, e.g., in person investment advice on the George app). Someone with a lower risk tolerance may have a larger portion of their portfolio in bonds and cash versus stocks. Someone with a higher risk tolerance may have a larger portion of their portfolio in stocks/equities.
When putting together an investment plan, it is important to establish:
- investment objective,
- the initial amount of the investment,
- the future expected amount of the investment,
- the amount you are able to invest on a regular basis,
- risk tolerance,
- the time horizon over which you will invest,
- investment strategy,
- constraints,
- how you will monitor and measure the value of your investment.
The investment plan should be flexible and designed to withstand a changing market environment and be able to adapt to unexpected events.
Regular investing and discipline
Investing can evoke strong emotions. In the unpredictable world of investing, the key is to remain disciplined and patient and avoid making emotional decisions, especially during market fluctuations. Even the least risky investments can fluctuate. That too is simply a natural part of investing. Many investors have learned the hard way that trying to time their entry into the financial market (buying when prices are low) and exit (selling when prices are high) from the market leads to worse returns. Discipline and perspective are qualities that can help investors stay committed to their long-term investment plans even during periods of market uncertainty and help them avoid the temptation to make sudden changes based on short-term market movements.
No one has a crystal ball and knows in advance exactly when the best time to invest will be. This is why regular investing and spreading out the investment is one of the popular strategies for investors and is good for gaining first experience in investing. In this strategy, the investor invests the same amount of money at regular intervals (e.g. monthly) in a particular security or portfolio, regardless of the price. In other words, the investor does not have to worry about mistiming his investment, buying 'higher' one time and 'lower' the next, and the price of the asset is therefore averaged out. This strategy is a wise choice for many investors, it keeps you committed to investing while reducing the level of risk and the effects of volatility.
For example, here at Erste Asset Management GmbH, doing business in Slovakia through Erste Asset Management GmbH, pobočka Slovenská republika, investors can regularly invest in mutual funds from €20 per month and without an exit fee (the exit fee of 1.8% is only payable on cancellation within three years of the start of regular savings) through Slovenská Sporiteľna as our distributor.
The investor should not only invest regularly, but should increase the amount invested regularly if his financial situation allows. An increase in the regular investment can have a significant impact on the speed with which the investor reaches the expected future value of the investment as set out in the investment plan. In order to meet the investment objective, the investor must also rely on factors beyond his control, such as the performance of individual assets in the portfolio. The investor should therefore focus mainly on those factors that he can directly influence, which include the amount of the regular investment.
The following chart shows a simple example of the power of increasing investment. For this example, we have chosen our equity fund - Fond maximalizovaných výnosov (FMV). Suppose an investor invests €10,000 in FMV in 2009. At the end of 2023, such an investment would be worth €32,489. This situation can be seen in the blue curve on the graph. But the other curves are more interesting. In these situations, the investor also invests €10 000 in 2009, but then regularly invests a certain amount at the beginning of each year. The situation shown in yellow on the graph is if the investor invests €1,000 each year. In grey is the situation where the investor increases his annual investment of € 1 000 by 5% each year (1st year € 1 000, 2nd year € 1 050, 3rd year € 1 102,50...) and in orange by 10% (1st year € 1 000, 2nd year € 1 100, 3rd year € 1 210...). We can see that if the investor increases his deposit by 10% each year, he would have almost €21,000 more at the end of 2023 than if he did not increase his investment at all. The past performance shown below is not a reliable indicator of future performance.
Diversification
"Don't put all your eggs in one basket"
Thus, another important principle that an investor should follow is diversification. A diversified portfolio contains a mix of different asset types and investment instruments, as they may react differently to different events. By deliberately spreading investments across different securities, issuers, markets, currencies, etc., risk is spread. Ideally, losses from one security are neutralised by gains generated by other securities. When constructing a portfolio to meet a specific objective, it is important to select the combination of assets that offers the best chance of meeting that objective, subject to investor constraints.
At our management company, we create portfolios composed of a variety of securities. For equity funds, such as the Fond maximalizovaných výnosov, diversification is used in two ways:
- The fund's portfolio is made up of stocks from different regions, such as Western Europe, Asia or North America. It should be said, however, that the portfolio is largely dominated by the North American region.
- The fund does not have investments in just one sector, but the portfolio includes several sectors, such as technology, but also finance, pharmaceutical companies or utilities.
Bond funds are often focused on a single region or currency. Eurový dlhopisový fond, o.p.f. invests in bonds issued in euros. The portfolio manager buys not only bonds of different companies, but also of countries or multinational entities.
Diversification is viewed from an even greater height in mixed funds, which include both stocks and bonds from around the world. Unlike equity and bond funds, we have other asset classes such as alternative investments (e.g. precious metals - gold) and real estate. This means we can create a portfolio made up of assets that have different return potential and risk. By combining them in different ways, we should be able to create the most optimal portfolio of investments at a risk that the client is able and willing to bear. Mixed funds may thus be suitable for the novice investor with a lower investment, as they replace to some extent a multi-fund portfolio.
In our real estate fund- ERSTE Realitná Renta, investments are diversified across multiple assets. The largest part consists of investments in equity interests in real estate companies that invest in real estate. The fund also includes bonds of issuers in the real estate sector. The fund invests in a number of properties located in different cities, which reduces concentration risk.
The following figure also confirms that diversification makes sense. In the figure we can see that different asset classes have performed differently over the last ten years. In some years equities have done better, in others bonds, in others gold for example.
Costs
Nothing is free, and this is also true when it comes to investing. When investing, an investor may encounter different types of fees. He should keep track of them and always know what he is paying for and how much he is paying so that he can assess whether it will be profitable for him. One of the most important factors in any charges is transparency. This is also true when investing in mutual funds. Thanks to strict regulations, mutual fund investing is one of the most transparent investments, which means that you know the fees in advance, they are not hidden.
Entry and exit fees
The most common fees associated with investing in mutual funds are the entry and exit fees, which are associated with the issuance and redemption of units. These are charged by the management company, through the bank as distributor, on the client's investment when the client buys or sells the investment. In the case of our mutual funds, the fees can be divided into two categories and the amount of the fees depends on these categories.
The first category is one-off/single investment, where the percentage of the entry fee is tiered according to the same or similar focus of the fund. From very conservative, where the fee is 0.5%, to conservative 1.0%, balanced 1.5% and dynamic 2.0%. The maximum entry fee in our funds is therefore 2%. If you were to make a one-off investment of €5,000 in, for example, the Eurový dlhopisový fond, an entry fee of 1% would be deducted from this investment, which in our example is €50. Only from the amount less the entry fee will units equivalent to €4,950 be issued. The exit fee for a one-off investment is 0%.
The second category is savings plan. The entry fee is 0 %. Whether an exit fee is charged at the time of redemption of the units depends on the duration of the regular investment in the form of savings plan. For savings plan of more than 3 years, the exit fee is 0%. For savings plan of less than three years, the exit fee is 1,8 % of the amount paid out. For example, if you had a 2.5 year savings plan set up in the Fond maximalizovaných výnosov and you opt for a payout of €5,000 worth of units, you will be deducted a 1.8% exit fee, which amounts to €90. You will therefore be paid €4,910.
The amount of the investment also depends on the amount of the entry fee discount, which can be granted to the client up to 80% of the standard fee.
Ongoing fee
This is a percentage of the statutory fees set out in the fund's statute for one year. It includes management and custodian fees, as well as the fund's transaction costs, account maintenance fees and other administrative or operational costs. The ongoing charge percentage gives an indication of how much an investment in the fund is 'worth'.
Management and custodian fee
In this paragraph we will explain in more detail the management and custodian fees that are part of the ongoing fee. The management fee is the fee charged by the management company for the management of the mutual fund in accordance with the fund's statute, the exact amount of which is set out in the fund's sales prospectus. The depositary fee is the remuneration for the performance of the activities of the depositary of a mutual fund within the meaning of the fund's statute in accordance with the law, which is payable to the depositary of the mutual fund, the exact amount of which is set out in the fund's sales prospectus. Unlike entry and exit fees, which are paid directly by the client, these are so-called indirect fees. These fees are calculated on the value of the total assets of the mutual fund. Their amount is included in the performance of the mutual fund. Both fees are calculated on a daily basis, which means that the unit value and performance are already net of these fees.
A confirmation of the amount of the entry or exit fee paid is the confirmation of the execution of the order, which is sent to the client after the issuance or redemption of the units. For further information not only on entry and exit fees but also on management fees, custodian fees and ongoing charges, please refer to the Sales prospectus and the fund Statute of each fund.
Taxation of investment in mutual funds
Proceeds from the sale of units arise when the redemption price is higher than the purchase price (taking into account all fees), and this income from the redemption of units is subject to income tax at 19% under the Income Tax Act. This tax is automatically withheld by the management company from Slovak mutual funds.
Monitoring and evaluation of the investment
Evaluating the performance of your investments is a critical part of managing and monitoring your assets over time. Most investors only need to check their portfolio a few times a month to keep everything under control. If you're investing for the long term and your investment horizon is long, there's no reason to check your portfolio every day and worry about every minor dip. There is such a thing as over-monitoring your portfolio, which can cause you to act emotionally and make poor decisions. This phenomenon has been studied by Dan Eagan, who is the managing director of behavioral finance and investing at Betterment. His research has shown that the more often investors monitor their portfolio, the riskier they perceive investing to be. He also dubbed this phenomenon myopic loss aversion - when investors constantly check their investments, they become more sensitive to losses than gains.
In general, you can find the current value of any investment online. In the case of our mutual funds, you can see the value of your investments in the George app. The mutual fund management company also publishes various reports and documents where you can find out about performance but also other things, such as changes to the assets in portfolio.
Don't wait to invest
“Time in the market beats timing the market.”
The reason why early investing is so advantageous is compound interest. Simply put, compound interest is the phenomenon of earning interest on interest. For example, let's say you make an initial deposit of €1,000 into a deposit account where the deposit earns 10% interest per annum. By the end of the year, you will have earned €100 in gross interest. The following year, with a total of €1 100 and assuming the same rate of return, you will earn €110 gross interest. And these annual profits, although they seem small at first, increase significantly over time.
Even if you stop investing, your money grows faster when you invested in your youth. The reality for most people is that financial priorities change over time, so your ability to invest may change as well. For example, if you are able to start investing at a young age, but then stop (and can't continue again), the initial investment will yield more benefit than if you waited to start until you were older and invested longer.
You can see the power of compound interest in the following figure. In this example, we have two investors. Investor 1 starts investing €1,000 each year at the age of 25 and does so for 10 years. Investor 2 starts investing later, namely at the age of 40, and does so for 20 years. He also invests €1 000, so his total investment is €20 000. In both cases, we assume an appreciation of the investment of 5% p.a. Thus, also from the graph we can see that investor 1 started early, invested €10 000 less but at the age of 65 the value of his assets was more than €13 000 higher.
Conclusion
The topic of investing is becoming more and more popular and, as you can see from this guide, investing may not be as complicated as it may seem at first glance. Even the biggest and most famous investors follow most of the principles mentioned in this guide. If you follow them too, you will appreciate the importance of investing in mutual funds in the long run. We have written this guide to help new and novice investors get started and to introduce them to the basics of investing. But it can also help people who already have some experience with investing. So we hope you have found this guide useful and we wish you the best of luck in making your future investment decisions.
Disclaimer:
This document serves as a supplementary source of information for investors. This document does not constitute the provision of investment advice, has not been prepared as investment research, is not a proposal for the conclusion of a transaction by Erste Asset Management GmbH, which operates in the Slovak Republic through its organizational unit Erste Asset Management GmbH, pobočka Slovenská republika, (hereinafter referred to as "EAM SK") and does not imply any obligations whatsoever. The document has been prepared without taking into account the personal situation of the potential beneficiaries and their knowledge and experience in the field of investment. The information contained in this document is for information purposes only and is based on the best sources of information available at the time of its preparation and is valid at the time of its preparation. The information is subject to change without further notice. EAM SK does not warrant the accuracy and completeness of the information contained in this document. EAM SK is the source of the information used, unless otherwise stated. Where the document contains data on the past performance of a financial instrument or underlying asset, this is not a reliable indicator of their future performance. Where the document contains any analyses and conclusions, these are of a general nature and do not take into account the individual needs of investors in terms of yield, taxation and level of acceptable risk. The information contained in this document may be further disseminated only with acknowledgement of the source of the information.
This is a marketing communication. Please refer to the fund's Statute, the fund's Sales Prospectus and to the Key Information Document before making any final investment decisions. They can be obtained in Slovak language at all sales points of the management company and at www.erste-am.sk.
The mutual funds mentioned in this document are managed by Erste Asset Management GmbH, with registered office at Am Belvedere 1, 1100 Vienna, Austria, registered in the Commercial Register of the Commercial Court of Vienna under registration number 102018 b, which is doing business in the territory of the Slovak Republic through the organisational unit Erste Asset Management GmbH, pobočka Slovenská republika, with registered office at Tomášikova 48, 832 65 Bratislava, IČO: 51 410 818, registered in the Commercial Register of the Municipal Court of Bratislava III, Section: Po, Insert No.: 4550/B. Investing in mutual funds is also associated with risk. The value of the investment may also decrease and there is no guarantee of a return on the amount originally invested. Past returns on an investment in mutual funds are no guarantee of future returns.