Mutual fund investor's guide

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.

"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.

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.

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.

“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.

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.